##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-Q

|                                                 |  |                                                                                             
|------------------------------------------------ |  | --------------------------------------------------------------------------------------------
|(Mark One)                                       |  |                                                                                             
|þ                                                |  | QUARTERLY REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|                                                
|For the quarterly period ended June 30,
    2004
|                                                
|or                                              
|                                                
|o                                                |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|                                                 |  | For the transition period
    from           to           .                                 

Commission File Number 000-50405

Acusphere, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                      
|------------------------------------------------------------------ |  | -------------------------------------
|Delaware                                                           |  | 04-3208947                           
|(State or other jurisdiction of
    incorporation or organization) |  | (IRS Employer
    Identification No.)
|                                                                  
|500 Arsenal Street
    Watertown, Massachusetts                    |  | 02472(Zip Code)                      
|(Address of principal executive
    offices)                       |  |                                      

Registrants Telephone Number, Including
Area Code:

(617) 648-8800


Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days.     Yes þ          No o

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Exchange
Act).     Yes o          No þ

As of August 3, 2004 there were
17,213,261 shares of the registrants common stock,
$.01 par value per share, outstanding.



---






---










ACUSPHERE, INC.

Form 10-Q

For the Quarterly Period Ended June 30,
2004


CONTENTS

|                                                                                                      |                                                            |                                                                                                                          |    |   |   | 
|----------------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------ | -- | - | - | 
|                                                                                                      |                                                            | Page                                                                                                                    
|                                                                                                      |                                                            | Number                                                                                                                  
|                                                                                                      |                                                            |                                                                                                                         
|PART I: FINANCIAL
    INFORMATION                                                                     |                                                            |                                                                                                                          | 2  |  
|Item 1. Consolidated
    Financial Statements                                                         |                                                            |                                                                                                                          | 2  |  
|                                                                                                      | Consolidated Balance Sheets
    (Unaudited):               |                                                                                                                          |    |   |  
|                                                                                                      |                                                            | December 31, 2003 and
    June 30, 2004.                                                                                 |    |   | 2 | 
|                                                                                                      | Consolidated Statements of
    Operations (Unaudited):     |                                                                                                                          |    |   |  
|                                                                                                      |                                                            | Three and Six Months ended
    June 30, 2003 and 2004 and the period from inception
    (July 12, 1993) to June 30, 2004 |    |   | 3 | 
|                                                                                                      | Consolidated Statements of
    Cash Flows (Unaudited):     |                                                                                                                          |    |   |  
|                                                                                                      |                                                            | Six Months ended
    June 30, 2003 and 2004 and the period from inception
    (July 12, 1993) to June 30, 2004.          |    |   | 4 | 
|                                                                                                      | Notes to Consolidated
    Financial Statements (Unaudited) |                                                                                                                          |    | 5 |  
|Item 2.
    Managements Discussion and Analysis of Financial Condition
    and Results of Operations |                                                            |                                                                                                                          | 10 |  
|Item 3. Quantitative
    and Qualitative Disclosure about Market Risk                                 |                                                            |                                                                                                                          | 35 |  
|Item 4. Controls and
    Procedures                                                                   |                                                            |                                                                                                                          | 35 |  
|PART II: OTHER
    INFORMATION                                                                        |                                                            |                                                                                                                          | 36 |  
|Item 1. Legal
    Proceedings                                                                         |                                                            |                                                                                                                          | 36 |  
|Item 2. Unregistered
    Sales of Equity Securities and Use of Proceeds                               |                                                            |                                                                                                                          | 36 |  
|Item 3. Defaults Upon
    Senior Securities                                                           |                                                            |                                                                                                                          | 37 |  
|Item 4. Submission of
    Matters to a Vote of Security Holders                                       |                                                            |                                                                                                                          | 37 |  
|Item 5. Other
    Information                                                                         |                                                            |                                                                                                                          | 37 |  
|Item 6. Exhibits and
    Reports on Form 8-K                                                          |                                                            |                                                                                                                          | 37 |  
|Signature                                                                                             |                                                            |                                                                                                                          | 38 |  
|Ex-31.1 Section 302 Certification of CEO                                                             
|Ex-31.2 Section 302 Certification of CFO                                                             
|Ex-32.1 Section 906 Certification of CEO & CFO                                                       



1



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##### Table of Contents






PART I: FINANCIAL INFORMATION




ITEM 1.     CONSOLIDATED
FINANCIAL STATEMENTS


ACUSPHERE, INC. AND SUBSIDIARIES

(A Development Stage Company)




CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                                                        |                                                                                                                                                                                                                                    |                             |            |              |            |   |            |              |            | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | ---------- | ------------ | ---------- | - | ---------- | ------------ | ---------- | 
|                                                                                                                                                                                                        |                                                                                                                                                                                                                                    | December 31,                |            | June 30,    
|                                                                                                                                                                                                        |                                                                                                                                                                                                                                    | 2003                        |            | 2004        
|                                                                                                                                                                                                        |                                                                                                                                                                                                                                    |                             |            |             
|                                                                                                                                                                                                        |                                                                                                                                                                                                                                    |                             |            | (Unaudited) 
|ASSETS                                                                                                                                                                                                 
|CURRENT ASSETS:                                                                                                                                                                                         |                                                                                                                                                                                                                                    |                             |            |              |            |   |            |             
|                                                                                                                                                                                                        | Cash and cash equivalents                                                                                                                                                                                                          |                             | $          | 54,562,378   |            |   | $          | 38,817,222   |           
|                                                                                                                                                                                                        | Other current assets                                                                                                                                                                                                               |                             |            | 712,673      |            |   |            | 750,102      |           
|                                                                                                                                                                                                        |                                                                                                                                                                                                                                    |                             |            |              |            |   |            |             
|                                                                                                                                                                                                        |                                                                                                                                                                                                                                    | Total current assets        |            |              | 55,275,051 |   |            |              | 39,567,324 | 
|PROPERTY AND EQUIPMENT, At cost:                                                                                                                                                                        |                                                                                                                                                                                                                                    |                             |            |              |            |   |            |             
|                                                                                                                                                                                                        | Property and equipment (Note 4)                                                                                                                                                                                                    |                             |            | 9,959,855    |            |   |            | 13,373,308   |           
|                                                                                                                                                                                                        | Less accumulated depreciation and amortization                                                                                                                                                                                     |                             |            | 7,935,450    |            |   |            | 8,570,169    |           
|                                                                                                                                                                                                        |                                                                                                                                                                                                                                    |                             |            |              |            |   |            |             
|                                                                                                                                                                                                        |                                                                                                                                                                                                                                    | Property and equipment, net |            |              | 2,024,405  |   |            |              | 4,803,139  | 
|OTHER ASSETS                                                                                                                                                                                            |                                                                                                                                                                                                                                    |                             | 1,624,797  |              |            |   | 1,481,778  |             
|                                                                                                                                                                                                        |                                                                                                                                                                                                                                    |                             |            |              |            |   |            |             
|TOTAL                                                                                                                                                                                                   |                                                                                                                                                                                                                                    | $                           | 58,924,253 |              |            | $ | 45,852,241 |             
|                                                                                                                                                                                                        |                                                                                                                                                                                                                                    |                             |            |              |            |   |            |             
|LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
    STOCK, AND
    STOCKHOLDERS EQUITY                                                                                                                  
|CURRENT LIABILITIES:                                                                                                                                                                                    |                                                                                                                                                                                                                                    |                             |            |              |            |   |            |             
|                                                                                                                                                                                                        | Current portion of long-term obligations
    (Note 5)                                                                                                                                                                              |                             | $          | 884,799      |            |   | $          | 743,205      |           
|                                                                                                                                                                                                        | Accounts payable                                                                                                                                                                                                                   |                             |            | 1,519,981    |            |   |            | 1,831,739    |           
|                                                                                                                                                                                                        | Accrued expenses                                                                                                                                                                                                                   |                             |            | 1,939,012    |            |   |            | 2,623,082    |           
|                                                                                                                                                                                                        |                                                                                                                                                                                                                                    |                             |            |              |            |   |            |             
|                                                                                                                                                                                                        |                                                                                                                                                                                                                                    | Total current liabilities   |            |              | 4,343,792  |   |            |              | 5,198,026  | 
|                                                                                                                                                                                                        |                                                                                                                                                                                                                                    |                             |            |              |            |   |            |             
|LONG-TERM OBLIGATIONS, net of current portion                                                                                                                                                           |                                                                                                                                                                                                                                    |                             | 205,418    |              |            |   | 315,769    |             
|                                                                                                                                                                                                        |                                                                                                                                                                                                                                    |                             |            |              |            |   |            |             
|COMMITMENTS                                                                                                                                                                                             |                                                                                                                                                                                                                                    |                             |            |              |            |   |            |             
|REDEEMABLE CONVERTIBLE PREFERRED STOCK,
    authorized, 5,000,000 shares as of December 31, 2003
    and June 30, 2004; no shares issued and outstanding as of
    December 31, 2003 and March 31, 2004 |                                                                                                                                                                                                                                    |                             |           |              |            |   |           |             
|                                                                                                                                                                                                        |                                                                                                                                                                                                                                    |                             |            |              |            |   |            |             
|STOCKHOLDERS EQUITY:                                                                                                                                                                                   |                                                                                                                                                                                                                                    |                             |            |              |            |   |            |             
|                                                                                                                                                                                                        | Common stock, $0.01 par value; authorized,
    98,500,000 shares as of December 31, 2003 and
    June 30, 2004; issued and outstanding
    14,294,533 shares as of December 31, 2003 and
    14,332,310 shares as of June 30, 2004 |                             |            | 142,945      |            |   |            | 143,323      |           
|                                                                                                                                                                                                        | Additional paid-in capital                                                                                                                                                                                                         |                             |            | 201,422,784  |            |   |            | 201,593,270  |           
|                                                                                                                                                                                                        | Deferred stock-based compensation                                                                                                                                                                                                  |                             |            | (1,723,229   | )          |   |            | (1,386,918   | )         
|                                                                                                                                                                                                        | Deficit accumulated during development stage                                                                                                                                                                                       |                             |            | (145,467,457 | )          |   |            | (160,011,229 | )         
|                                                                                                                                                                                                        |                                                                                                                                                                                                                                    |                             |            |              |            |   |            |             
|                                                                                                                                                                                                        |                                                                                                                                                                                                                                    | Total stockholders equity  |            |              | 54,375,043 |   |            |              | 40,338,446 | 
|                                                                                                                                                                                                        |                                                                                                                                                                                                                                    |                             |            |              |            |   |            |             
|TOTAL                                                                                                                                                                                                   |                                                                                                                                                                                                                                    | $                           | 58,924,253 |              |            | $ | 45,852,241 |             
|                                                                                                                                                                                                        |                                                                                                                                                                                                                                    |                             |            |              |            |   |            |             

The accompanying notes are an integral part of
these consolidated financial statements.

2



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##### Table of Contents



ACUSPHERE, INC. AND SUBSIDIARIES

(A Development Stage Company)




CONSOLIDATED STATEMENTS OF
OPERATIONS

(Unaudited)


|                                                                                |                               |                          |            |                  |           |                     |            |               |           |      |             |           |           |   |             |            |            |   |              |            |             | 
|------------------------------------------------------------------------------- | ----------------------------- | ------------------------ | ---------- | ---------------- | --------- | ------------------- | ---------- | ------------- | --------- | ---- | ----------- | --------- | --------- | - | ----------- | ---------- | ---------- | - | ------------ | ---------- | ----------- | 
|                                                                                |                               |                          |            |                  |           | Period from        
|                                                                                |                               | Three Months Ended       |            | Six Months Ended |           | Inception (July 12,
|                                                                                |                               |                          |            |                  |           | 1993) to June 30,  
|                                                                                |                               | June 30, 2003            |            | June 30, 2004    |           | June 30, 2003       |            | June 30, 2004 |           | 2004
|                                                                                |                               |                          |            |                  |           |                     |            |               |           |     
|OPERATING EXPENSES:                                                             |                               |                          |            |                  |           |                     |            |               |           |      |             |           |           |   |             |            |            |   |              |           
|                                                                                | Research and development(1)   |                          | $          | 3,146,030        |           |                     | $          | 6,103,035     |           |      | $           | 6,248,316 |           |   | $           | 11,615,889 |            |   | $            | 84,168,987 |            
|                                                                                | General and administrative(1) |                          |            | 990,838          |           |                     |            | 1,408,142     |           |      |             | 1,854,406 |           |   |             | 2,669,522  |            |   |              | 22,794,444 |            
|                                                                                | Stock-based compensation      |                          |            | 391,815          |           |                     |            | 226,371       |           |      |             | 711,813   |           |   |             | 459,052    |            |   |              | 5,126,637  |            
|                                                                                |                               |                          |            |                  |           |                     |            |               |           |      |             |           |           |   |             |            |            |   |              |           
|                                                                                |                               | Total operating expenses |            |                  | 4,528,683 |                     |            |               | 7,737,548 |      |             |           | 8,814,535 |   |             |            | 14,744,463 |   |              |            | 112,090,068 | 
|Equity in loss of joint venture                                                 |                               |                          |           |                  |           |                     |           |               |           |      |            |           |           |   |            |            |            |   | 15,164,257   |           
|Interest income                                                                 |                               |                          | 47,004     |                  |           |                     | 93,761     |               |           |      | 69,110      |           |           |   | 201,534     |            |            |   | 4,175,472    |           
|Other income (expense)                                                          |                               |                          | (121,208   | )                |           |                     | 74,268     |               |           |      | (121,208    | )         |           |   | 74,268      |            |            |   | 106,083      |           
|Interest expense                                                                |                               |                          | (815,566   | )                |           |                     | (49,691    | )             |           |      | (1,040,008  | )         |           |   | (75,111     | )          |            |   | (6,781,009   | )         
|                                                                                |                               |                          |            |                  |           |                     |            |               |           |      |             |           |           |   |             |            |            |   |              |           
|NET LOSS                                                                        |                               |                          | (5,418,453 | )                |           |                     | (7,619,210 | )             |           |      | (9,906,641  | )         |           |   | (14,543,772 | )          |            |   | (129,753,779 | )         
|Accretion of dividends and offering costs on
    preferred stock                |                               |                          | 1,625,778  |                  |           |                     |           |               |           |      | 3,234,945   |           |           |   |            |            |            |   | 30,257,450   |           
|                                                                                |                               |                          |            |                  |           |                     |            |               |           |      |             |           |           |   |             |            |            |   |              |           
|NET LOSS AVAILABLE TO COMMON STOCKHOLDERS                                       |                               | $                        | (7,044,231 | )                |           | $                   | (7,619,210 | )             |           | $    | (13,141,586 | )         |           | $ | (14,543,772 | )          |            | $ | (160,011,229 | )         
|                                                                                |                               |                          |            |                  |           |                     |            |               |           |      |             |           |           |   |             |            |            |   |              |           
|NET LOSS AVAILABLE TO COMMON STOCKHOLDERS PER
    SHARE 
    Basic and diluted |                               | $                        | (5.81      | )                |           | $                   | (0.53      | )             |           | $    | (10.87      | )         |           | $ | (1.02       | )          |            |   |              |           
|                                                                                |                               |                          |            |                  |           |                     |            |               |           |      |             |           |           |   |             |            |            |   |              |           
|WEIGHTED-AVERAGE SHARES
    OUTSTANDING 
    Basic and diluted                 |                               |                          | 1,212,066  |                  |           |                     | 14,310,311 |               |           |      | 1,209,318   |           |           |   | 14,298,202  |            |            |   |              |           
|                                                                                |                               |                          |            |                  |           |                     |            |               |           |      |             |           |           |   |             |            |            |   |              |           
|                                                                                |                               |                          |            |                  |           |                     |            |               |           |      |             |           |           |   |             |            |            |   |              |           
|(1) Excludes stock-based compensation as
    follows:                           |                               |                          |            |                  |           |                     |            |               |           |      |             |           |           |   |             |            |            |   |              |           
|Research and development                                                        |                               | $                        | 197,028    |                  |           | $                   | 89,580     |               |           | $    | 325,028     |           |           | $ | 179,529     |            |            | $ | 2,173,672    |           
|                                                                                | General and administrative    |                          |            | 194,787          |           |                     |            | 136,791       |           |      |             | 386,785   |           |   |             | 279,523    |            |   |              | 2,952,965  |            
|                                                                                |                               |                          |            |                  |           |                     |            |               |           |      |             |           |           |   |             |            |            |   |              |           
|                                                                                |                               | $                        | 391,815    |                  |           | $                   | 226,371    |               |           | $    | 711,813     |           |           | $ | 459,052     |            |            | $ | 5,126,637    |           
|                                                                                |                               |                          |            |                  |           |                     |            |               |           |      |             |           |           |   |             |            |            |   |              |           

The accompanying notes are an integral part of
these consolidated financial statements.

3



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##### Table of Contents



ACUSPHERE, INC. AND SUBSIDIARIES

(A Development Stage Company)




CONSOLIDATED STATEMENTS OF CASH
FLOWS


(Unaudited)


|                                                         |                                                                              |                                              |                        |                                           |           |             |             |             |         |         |             |              |            |            |             |  
|-------------------------------------------------------- | ---------------------------------------------------------------------------- | -------------------------------------------- | ---------------------- | ----------------------------------------- | --------- | ----------- | ----------- | ----------- | ------- | ------- | ----------- | ------------ | ---------- | ---------- | ----------- | -
|                                                         |                                                                              |                                              |                        | Period from                              
|                                                         |                                                                              | Six Months Ended                             |                        | Inception                                
|                                                         |                                                                              |                                              |                        | (July 12, 1993)                          
|                                                         |                                                                              | June 30,                                     |                        | June 30,                                  |           | to June 30,
|                                                         |                                                                              | 2003                                         |                        | 2004                                      |           | 2004       
|                                                         |                                                                              |                                              |                        |                                           |           |            
|CASH FLOWS FROM OPERATING ACTIVITIES:                    |                                                                              |                                              |                        |                                           |           |             |             |             |         |         |             |             
|                                                         | Net loss                                                                     |                                              | $                      | (9,906,641                                | )         |             | $           | (14,543,772 | )       |         | $           | (129,753,779 | )         
|                                                         | Adjustments to reconcile net loss to cash used in
    operating activities:  |                                              |                        |                                           |           |             |             |             |         |         |             |              |           
|                                                         |                                                                              | Stock-based compensation expense             |                        |                                           | 711,813   |             |             |             | 459,052 |         |             |              | 5,126,637  |           
|                                                         |                                                                              | Depreciation and amortization                |                        |                                           | 1,074,613 |             |             |             | 634,719 |         |             |              | 9,384,483  |           
|                                                         |                                                                              | Noncash interest expense                     |                        |                                           | 406,145   |             |             |             | 34,132  |         |             |              | 2,003,400  |           
|                                                         |                                                                              | Noncash rent expense                         |                        |                                           | 26,820    |             |             |             | 26,820  |         |             |              | 134,100    |           
|                                                         |                                                                              | Equity in loss from joint venture            |                        |                                           |          |             |             |             |        |         |             |              | 15,164,257 |           
|                                                         |                                                                              | Changes in operating assets and liabilities: |                        |                                           |           |             |             |             |         |         |             |              |            |           
|                                                         |                                                                              |                                              | Due from joint venture |                                           |           |            |             |             |         |        |             |              |            | (3,149,257 | )          
|                                                         |                                                                              |                                              | Other current assets   |                                           |           | (67,428     | )           |             |         | 20,575  |             |              |            | (809,359   | )          
|                                                         |                                                                              |                                              | Accounts payable       |                                           |           | 96,700      |             |             |         | 311,757 |             |              |            | 1,831,740  |            
|                                                         |                                                                              |                                              | Accrued expenses       |                                           |           | 301,800     |             |             |         | 684,069 |             |              |            | 3,607,008  |            
|                                                         |                                                                              |                                              |                        |                                           |           |             |             |             |         |         |             |             
|                                                         |                                                                              |                                              |                        | Net cash used in operating activities     |           |             | (7,356,178  | )           |         |         | (12,372,648 | )            |            |            | (96,460,770 | )
|                                                         |                                                                              |                                              |                        |                                           |           |             |             |             |         |         |             |             
|CASH FLOWS FROM INVESTING ACTIVITIES:                    |                                                                              |                                              |                        |                                           |           |             |             |             |         |         |             |             
|                                                         | Purchases of property and equipment                                          |                                              |                        | (252,551                                  | )         |             |             | (3,353,258  | )       |         |             | (5,130,856   | )         
|                                                         | Increase in other assets                                                     |                                              |                        | (243,350                                  | )         |             |             | (26,999     | )       |         |             | (1,765,245   | )         
|                                                         | Investment in joint venture                                                  |                                              |                        |                                          |           |             |             |            |         |         |             | (12,015,000  | )         
|                                                         | Maturities of short-term investments                                         |                                              |                        | (3,546,219                                | )         |             |             |            |         |         |             | 17,499       |           
|                                                         |                                                                              |                                              |                        |                                           |           |             |             |             |         |         |             |             
|                                                         |                                                                              |                                              |                        | Net cash used in investing activities     |           |             | (4,042,120  | )           |         |         | (3,380,257  | )            |            |            | (18,893,602 | )
|                                                         |                                                                              |                                              |                        |                                           |           |             |             |             |         |         |             |             
|CASH FLOWS FROM FINANCING ACTIVITIES:                    |                                                                              |                                              |                        |                                           |           |             |             |             |         |         |             |             
|                                                         | Payments on long-term obligations                                            |                                              |                        | (3,957,712                                | )         |             |             | (464,528    | )       |         |             | (18,245,746  | )         
|                                                         | Proceeds from long-term obligations                                          |                                              |                        | 19,440,342                                |           |             |             | 424,153     |         |         |             | 29,864,495   |           
|                                                         | Proceeds from financing of equipment                                         |                                              |                        |                                          |           |             |             |            |         |         |             | 347,960      |           
|                                                         | Net proceeds from sale of redeemable convertible
    preferred stock         |                                              |                        |                                          |           |             |             |            |         |         |             | 94,337,203   |           
|                                                         | Net proceeds from sale of common stock in initial
    public offering        |                                              |                        |                                          |           |             |             |            |         |         |             | 47,618,443   |           
|                                                         | Net proceeds from exercise of stock options                                  |                                              |                        | 1,889                                     |           |             |             | 35,960      |         |         |             | 238,435      |           
|                                                         | Proceeds from issuance of common stock from
    employee stock purchase plan |                                              |                        |                                          |           |             |             | 12,164      |         |         |             | 12,164       |           
|                                                         | Purchase and retirement of treasury stock                                    |                                              |                        |                                          |           |             |             |            |         |         |             | (1,360       | )         
|                                                         |                                                                              |                                              |                        |                                           |           |             |             |             |         |         |             |             
|                                                         |                                                                              |                                              |                        | Net cash provided by financing activities |           |             | 15,484,519  |             |         |         | 7,749       |              |            |            | 154,171,594 |  
|                                                         |                                                                              |                                              |                        |                                           |           |             |             |             |         |         |             |             
|NET INCREASE (DECREASE) IN CASH AND CASH
    EQUIVALENTS |                                                                              |                                              | 4,086,221              |                                           |           |             | (15,745,156 | )           |         |         | 38,817,222  |             
|CASH AND CASH EQUIVALENTS  Beginning
    of period      |                                                                              |                                              | 7,796,238              |                                           |           |             | 54,562,378  |             |         |         |            |             
|                                                         |                                                                              |                                              |                        |                                           |           |             |             |             |         |         |             |             
|CASH AND CASH EQUIVALENTS  End of
    period            |                                                                              | $                                            | 11,882,459             |                                           |           | $           | 38,817,222  |             |         | $       | 38,817,222  |             
|                                                         |                                                                              |                                              |                        |                                           |           |             |             |             |         |         |             |             

The accompanying notes are an integral part of
these consolidated financial statements.

4



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##### Table of Contents



ACUSPHERE, INC. AND SUBSIDIARIES

(A Development Stage Company)




NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


(Unaudited)




|   |                      
|-- | ---------------------
|1. | Basis of Presentation

The accompanying unaudited consolidated financial
statements of Acusphere, Inc. and Subsidiaries (the
Company), have been prepared in accordance with
generally accepted accounting principles in the United States of
America for interim financial information and with the
instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles in the United States of America for
complete financial statements. These statements should be read
in conjunction with the consolidated financial statements and
notes thereto included in the Companys latest audited
annual financial statements. Those audited statements are
included in our Annual Report on Form 10-K for the year
ended December 31, 2003, which has been filed with the SEC.

In the opinion of management, all adjustments,
consisting only of normal, recurring adjustments considered
necessary for a fair presentation of the results of these
interim periods have been included. The results of operations
for the three and six months ended June 30, 2004 may not be
indicative of the results that may be expected for the full
fiscal year.

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported
amounts of expenses during the reporting period. Actual results
could differ from those estimates or assumptions. The more
significant estimates reflected in these financial statements
include judgmental accrued expenses and valuation of stock-based
compensation.



|   |                                            
|-- | -------------------------------------------
|2. | Accounting for Stock-based
    Compensation

The Companys employee stock option plans
are accounted for using the intrinsic-value-based method of
Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Accordingly, no
compensation expense is recorded for options issued to employees
with fixed amounts and fixed exercise prices which for
accounting purposes are at least equal to the fair value of the
Companys common stock at the date of grant. Conversely,
when the exercise price for accounting purposes is below fair
value of the Companys common stock on the date of grant, a
non-cash charge to compensation expense is recorded ratably over
the term of the option vesting period in an amount equal to the
difference between the value calculated using the exercise price
and the fair value. The Company uses the fair-value method to
account for non-employee stock-based compensation.

Stock options granted during 2004 are as follows:

|                            |                |        |  |           |  |           |   |           |  |  |   |      | 
|--------------------------- | -------------- | ------ |  | --------- |  | --------- | - | --------- |  |  | - | ---- | 
|                            |                |        |  |           |  | Weighted 
|                            |                |        |  |           |  | Average  
|                            |                | Number |  | Exercise  |  | Exercise 
|                            |                | of     |  | Price Per |  | Price Per
|                            |                | Shares |  | Share     |  | Share    
|                            |                |        |  |           |  |          
|For the three months ended: |                |        |  |           |  |           |   |           |  |  |   |     
|                            | March 31, 2004 |        |  | 541,139   |  |           | $ | 8.50-9.60 |  |  | $ | 9.08 | 
|                            | June 30, 2004  |        |  | 153,600   |  |           | $ | 6.12-7.85 |  |  | $ | 6.49 | 

The stock options granted in the three months
ended March 31, 2004 and in the three months ended
June 30, 2004 were granted at fair market value on the date
of grant.

Had compensation cost for grants issued during
the current and prior periods been determined consistent with
Statement of Financial Accounting Standard (SFAS)
No. 123, Accounting for Stock-based

5



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##### Table of Contents



ACUSPHERE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Compensation, using the fair value method,
pro forma net loss and net loss per share would have been the
following:

|                                   |                                                                                          |                    |   |                  |   |          |   |            |   |  |   |             |   |  |   |             |  
|---------------------------------- | ---------------------------------------------------------------------------------------- | ------------------ | - | ---------------- | - | -------- | - | ---------- | - |  | - | ----------- | - |  | - | ----------- | -
|                                   |                                                                                          |                    |   |                 
|                                   |                                                                                          | Three Months Ended |   | Six Months Ended
|                                   |                                                                                          |                    |   |                 
|                                   |                                                                                          | June 30,           |   | June 30,         |   | June 30, |   | June 30,  
|                                   |                                                                                          | 2003               |   | 2004             |   | 2003     |   | 2004      
|                                   |                                                                                          |                    |   |                  |   |          |   |           
|Applicable to common stockholders: |                                                                                          |                    |   |                  |   |          |   |            |   |  |   |             |   |  |   |            
|                                   | Net loss  as reported                                                                   |                    | $ | (7,044,231       | ) |          | $ | (7,619,210 | ) |  | $ | (13,141,586 | ) |  | $ | (14,543,772 | )
|                                   | Add: Stock-based employee compensation expense
    included in reported net loss         |                    |   | 284,453          |   |          |   | 194,815    |   |  |   | 604,451     |   |  |   | 390,042     |  
|                                   | Deduct: Stock-based employee compensation expense
    determined under fair value method |                    |   | (506,885         | ) |          |   | (446,614   | ) |  |   | (1,008,464  | ) |  |   | (872,214    | )
|                                   |                                                                                          |                    |   |                  |   |          |   |            |   |  |   |             |   |  |   |            
|                                   | Net loss  proforma                                                                      |                    | $ | (7,266,663       | ) |          | $ | (7,871,009 | ) |  | $ | (13,545,599 | ) |  | $ | (15,025,944 | )
|                                   |                                                                                          |                    |   |                  |   |          |   |            |   |  |   |             |   |  |   |            
|                                   | Net loss per common share (basic and diluted):                                           |                    |   |                  |   |          |   |            |   |  |   |             |   |  |   |             |  
|                                   | As reported                                                                              |                    | $ | (5.81            | ) |          | $ | (0.53      | ) |  | $ | (10.87      | ) |  | $ | (1.02       | )
|                                   | Pro forma                                                                                |                    | $ | (6.00            | ) |          | $ | (0.55      | ) |  | $ | (11.20      | ) |  | $ | (1.05       | )
|                                   |                                                                                          |                    |   |                  |   |          |   |            |   |  |   |             |   |  |   |            



|   |                          
|-- | -------------------------
|3. | Net Loss Per Common Share

Basic and diluted net loss per common share is
calculated by dividing the net loss applicable to common
stockholders by the weighted-average number of unrestricted
common shares outstanding during the period. Diluted net loss
per common share is the same as basic net loss per common share,
since the effects of potentially dilutive securities are
antidilutive for all periods presented. Antidilutive securities,
which consist of redeemable convertible preferred stock prior to
2004, stock options, warrants, and restricted common stock that
are not included in the diluted net loss per share calculation,
aggregated 8,011,739 and 2,401,058 as of June 30, 2003 and
2004, respectively.

The following table reconciles weighted-average
common shares outstanding to the shares used in the computation
of basic and diluted weighted-average common shares outstanding:

|                                                                        |  |                    |           |                  |  |          |            |          |  |  |           |   |  |  |            |  
|----------------------------------------------------------------------- |  | ------------------ | --------- | ---------------- |  | -------- | ---------- | -------- |  |  | --------- | - |  |  | ---------- | -
|                                                                        |  |                    |           |                 
|                                                                        |  | Three Months Ended |           | Six Months Ended
|                                                                        |  |                    |           |                 
|                                                                        |  | June 30,           |           | June 30,         |  | June 30, |            | June 30,
|                                                                        |  | 2003               |           | 2004             |  | 2003     |            | 2004    
|                                                                        |  |                    |           |                  |  |          |            |         
|Weighted-average common shares outstanding                              |  |                    | 1,228,247 |                  |  |          | 14,319,915 |          |  |  | 1,214,811 |   |  |  | 14,308,598 |  
|Less weighted-average unvested restricted common
    shares outstanding |  |                    | (16,181   | )                |  |          | (9,604     | )        |  |  | (5,493    | ) |  |  | (10,396    | )
|                                                                        |  |                    |           |                  |  |          |            |          |  |  |           |   |  |  |            |  
|Basic and diluted weighted-average common shares
    outstanding        |  |                    | 1,212,066 |                  |  |          | 14,310,311 |          |  |  | 1,209,318 |   |  |  | 14,298,202 |  
|                                                                        |  |                    |           |                  |  |          |            |          |  |  |           |   |  |  |            |  

6



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##### Table of Contents



ACUSPHERE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                       
|-- | ----------------------
|4. | Property and Equipment

Property and equipment at cost consist of the
following:

|                                |                              |              |           |           |  |   |            |            | 
|------------------------------- | ---------------------------- | ------------ | --------- | --------- |  | - | ---------- | ---------- | 
|                                |                              |             
|                                |                              | As of:      
|                                |                              |             
|                                |                              | December 31, |           | June 30, 
|                                |                              | 2003         |           | 2004     
|                                |                              |              |           |          
|Equipment                       |                              | $            | 9,655,685 |           |  | $ | 10,143,476 |           
|Furniture and fixtures          |                              |              | 181,665   |           |  |   | 195,004    |           
|Leasehold improvements          |                              |              | 122,505   |           |  |   | 129,465    |           
|Deposits on equipment purchases |                              |              |          |           |  |   | 2,905,363  |           
|                                |                              |              |           |           |  |   |            |           
|                                | Total property and equipment |              | $         | 9,959,855 |  |   | $          | 13,373,308 | 
|                                |                              |              |           |           |  |   |            |           



|   |                      
|-- | ---------------------
|5. | Long-term Obligations

The carrying value of long-term obligations is as
follows:

|                           |  |              |           |          |  |   |           | 
|-------------------------- |  | ------------ | --------- | -------- |  | - | --------- | 
|                           |  |             
|                           |  | As of:      
|                           |  |             
|                           |  | December 31, |           | June 30,
|                           |  | 2003         |           | 2004    
|                           |  |              |           |         
|Capital lease obligations  |  | $            | 1,090,217 |          |  | $ | 644,236   | 
|Notes payable              |  |              |          |          |  |   | 414,738   | 
|                           |  |              |           |          |  |   |           | 
|                           |  |              | 1,090,217 |          |  |   | 1,058,974 | 
|Less current maturities    |  |              | 884,799   |          |  |   | 743,205   | 
|                           |  |              |           |          |  |   |           | 
|Long-term obligations, net |  | $            | 205,418   |          |  | $ | 315,769   | 
|                           |  |              |           |          |  |   |           | 

Long-term obligations, including current
maturities, outstanding as of June 30, 2004 consisted of
capital equipment leased under various capital lease
arrangements and promissory notes under the equipment financing
line, described below. Monthly payments under the capital lease
obligations range from $3,708 to $46,222 with maturities through
April 2005.

In April 2004, the Company entered into an
$8.0 million equipment financing line with an equipment
financing company. Borrowings under this equipment line can be
made against qualified purchases through March 2005. Such
borrowings are to be secured by the qualified purchases and
repaid over 36 to 48 months, depending on the nature of the
equipment financed. No warrants were granted in connection with
this equipment line. The $8.0 million equipment line is
structured as a loan agreement. However, the Company may elect
to borrow up to $4.0 million of this amount in the form of
a capital lease. The interest rate on this facility varies
depending upon whether the borrowing is in the form of a loan or
lease and whether the term is 36 months or 48 months.
Such interest rates are fixed at the time of each borrowing
under the equipment line with such rates adjusted between
borrowings based on the U.S. Federal Reserves Three
Year and Four Year Treasury Constant Maturity Rates. The
equipment line includes provisions to increase the line to
$11.3 million upon the occurrence of certain defined
events. As of June 30, 2004, the Company has approximately
$7.6 million available in additional borrowings under this
equipment line. Monthly payments for the amounts outstanding
under the equipment financing line range from $1,526 to $4,697
with maturities through July 2008.



|   |                     
|-- | --------------------
|6. | Stockholders Equity

On July 1, 2003, 3,731,999 shares of
several series of preferred stock were converted into
732,600 shares of common stock. These conversions were
based upon the conversion ratios then applicable for each series
of

7



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##### Table of Contents



ACUSPHERE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

preferred stock. On October 14, 2003, upon
the closing of the Companys initial public offering, all
remaining outstanding shares of preferred stock were converted
into shares of common stock based upon the conversion ratios
then applicable.

As of June 30, 2004, there were
1,203,707 shares of common stock reserved for outstanding
stock options previously issued under the Companys 1994
Stock Plan and 614,451 shares common stock reserved for
outstanding stock options issued under the 2003 Stock Option and
Incentive Plan. The 1994 Stock Plan expired as of March 7,
2004 and there are no more shares available for issuance under
this plan.

On September 12, 2003, the Company effected
a one for six reverse stock split, the effect of which has been
retroactively applied to all common stock outstanding and to all
common stock equivalents.



|   |                            
|-- | ---------------------------
|7. | Comprehensive Income (Loss)

Comprehensive loss is defined as the change in
stockholders deficit during a period from transactions and
other events and circumstances from non-owner sources. During
the three and six months ended June 30, 2003 and 2004,
other than reported net loss, the only other component of
comprehensive loss incurred by the Company were unrealized
losses of zero and $288, respectively, in 2003 and zero and
zero, respectively, in 2004, on short term investments.



|   |                  
|-- | -----------------
|8. | Subsequent Events



| |                                           
| | ------------------------------------------
| | Collaboration with Nycomed Danmark
    ApS

In July 2004, the Company entered into a
collaboration, license and supply agreement with Nycomed Danmark
ApS (Nycomed) in which the Company granted Nycomed rights to
develop and market AI-700 in Europe. As part of this agreement,
in July 2004 Nycomed paid the Company a $4.0 million
license fee and the first of eight consecutive quarterly
installments of $1.0 million each. We anticipate that a
portion of these fees and installments will be recognized as
revenues in 2004. Beginning in October 2004, Nycomed is required
to pay the Company the remaining seven consecutive quarterly
installments of $1.0 million each. The agreement also
provides for Nycomed to pay the Company up to $58.0 million
in milestone payments upon achievement of certain regulatory
milestones and sales goals. Under the agreement, the Company
will also be paid to manufacture AI-700 for Nycomed and is
entitled to royalties on Nycomeds sales of AI-700. The
Company will pay a customary fee to its financial advisor in
this transaction. The fee will be comprised of cash and warrants
and the total amount of such payments are dependent upon the
timing and magnitude of the amounts paid by Nycomed to the
Company.



| |                          
| | -------------------------
| | Commercial Facility Lease

In July 2004, the Company entered into a lease
agreement for 58,000 square feet of commercial
manufacturing space in Tewksbury, Massachusetts. This lease has
a five year, nine month term with options to extend the lease
for up to two additional five-year terms at predetermined rental
rates. Initially, Acusphere will receive nine months of
occupancy free of base rent, followed by base rent of
approximately $400,000 for the next twelve months with scheduled
annual rental rate increases thereafter. An initial security
deposit of $1.0 million is required as part of the lease,
subject to reduction upon the Company making certain tenant
improvements and the installation of equipment in the facility.



| |                  
| | -----------------
| | Private Financing

In July 2004, the Company entered into definitive
purchase agreements with institutional and accredited investors
for a $21.5 million private placement of up to 3,440,000
newly issued shares of common stock at a price of $6.25 per
share and warrants to purchase up to an additional
688,000 shares of common stock at an exercise price of
$8.50 per share. In August 2004, a partial closing of this
private placement was

8



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##### Table of Contents



ACUSPHERE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

consummated, resulting in aggregate gross
proceeds to the Company of approximately $17.9 million and
the issuance of 2,865,522 shares of common stock and
warrants to purchase up to an additional 573,105 shares of
common stock.

A second and final closing of this private
financing will occur subject to receiving shareholder approval
in accordance with Nasdaq marketplace rules and customary
closing conditions. The second closing is expected to occur
later in 2004 and would result in aggregate gross proceeds to
the Company of approximately $3.6 million and the issuance
of 574,478 shares of common stock at a price of
$6.25 per share and warrants to purchase up to an
additional 114,895 shares of common stock at an exercise
price of $8.50 per share.

Net proceeds from the financing are expected to
be used to further fund the development program for AI-700 and
for working capital and general corporate purposes.

The shares of common stock and warrants sold in
the private placement have not been registered under the
Securities Act of 1933, as amended, or state securities laws and
may not be offered or sold in the United States absent
registration with the Securities and Exchange Commission or an
applicable exemption from these registration requirements. The
Company has agreed to file a registration statement with the
Securities and Exchange Commission covering the resale of the
shares of common stock issued in the private placement and the
shares of common stock issued upon exercise of the warrants.

9



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##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF
    FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements May Prove
Inaccurate

From time to time, information provided by us,
statements made by our employees or information included in our
filings with the Securities and Exchange Commission (including
this quarterly report on Form 10-Q) may contain statements
that are not historical facts, so-called forward-looking
statements, that involve known and unknown risks,
uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different
from any future results, performance or achievements expressed
or implied by these forward-looking statements. Such
forward-looking statements are made pursuant to the safe harbor
provisions of Section 21E of the Securities Exchange Act of
1934, as amended.

Forward-looking statements made in connection
with this Form 10-Q include, but are not limited to our
estimates of expenses, staffing and capital requirements and our
need and abilities to raise additional financing; statements
regarding our recent private financing, in particular regarding
the second closing and shareholder approval; timing of our
clinical trials and regulatory milestones for AI-700;
collaborative relationships and related license, development,
milestone, manufacturing, royalty and other payments; research
and development of and commercial prospects for our various
product candidates; and our manufacturing capabilities and
timing of manufacturing production for our product candidates,
including statements concerning our new commercial manufacturing
space and related build-out.

In some cases, you can identify forward-looking
statements by terms such as may, will,
should, could, would,
expect, plans, anticipates,
believes, estimates,
projects, predicts, intends,
potential and similar expression intended to
identify forward-looking statements. These statements reflect
our current views with respect to future events, and are based
on assumptions and subject to risks and uncertainties. Also,
these forward-looking statements represent our estimates and
assumptions only as of the date of this report. Given these
uncertainties, you should not place undue reliance on these
forward-looking statements. When considering forward-looking
statements, you should keep in mind the Factors That May
Affect Future Results and other cautionary statements
included in this report.

You should read this report with the
understanding that our actual future results may be materially
different from what we expect. Our business, financial
condition, results of operations and prospects may change. We
may not update these forward-looking statements, even though our
situation may change in the future, unless we have obligations
under the Federal securities laws to update and disclose
material developments related to previously disclosed
information. We qualify all of the information presented in this
report, and particularly our forward-looking statements, by
these cautionary statements.

Overview

We are a specialty pharmaceutical company that
develops new drugs and improved formulations of existing drugs
using our proprietary porous microparticle technology. We are
focused on developing proprietary drugs that can offer
significant benefits over existing drugs such as improved safety
and efficacy, increased patient compliance, greater ease of use,
expanded indications or reduced cost. Our three initial product
candidates are in clinical development and are designed to
address large unmet clinical needs within cardiology, oncology
and asthma. Our lead product candidate is a cardiovascular drug
in Phase III clinical development for the detection of
coronary heart disease, the leading cause of death in the United
States.

We created our three initial product candidates
using technology that enables us to control the size and
porosity of particles in a versatile manner, so we can customize
the particles to address the delivery needs of a variety of
drugs. We are focused on creating porous microparticles that are
smaller than red blood cells. Some of these microparticles are
smaller than 1 micron, which we refer to as nanoparticles.
Microparticles are important for delivering drugs intravenously
so that they can pass through the bodys smallest blood
vessels, for increasing the surface area of a drug so that the
drug will dissolve more rapidly, and for delivering drugs to the
lung via inhalation. Porosity is important for entrapping gases
in microparticles, for controlling the release rate of the drug
from a microparticle, and for targeting inhaled drugs to
specific regions of the lung.

10



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##### Table of Contents



We are a development stage company and have
devoted substantially all of our efforts towards the research
and development of our product candidates and raising capital.
Since our inception, we have had no revenue from product sales
and have funded our operations almost exclusively through the
private and public placement of equity securities, equipment
leases and debt financings. We have not been profitable and have
incurred a cumulative net loss of $130.0 million from
inception through June 30, 2004. We expect to emerge from
the development stage, for financial statement purposes, in the
third quarter of 2004 as a result of entering into a
collaboration, license and supply agreement with Nycomed Danmark
ApS.

We expect to incur significant operating losses
for the next several years. Research and development expenses
relating to our product candidates will continue to increase. In
particular, we expect to incur increased costs for
Phase III clinical trials of AI-700. General and
administrative costs will increase as we prepare for the
commercialization of our product candidates and as we incur
costs associated with operating as a newly public company.
Manufacturing expenses, which are currently part of research and
development expenses, will also increase as we prepare for the
commercialization of AI-700.

AI-700 Clinical Trial Update

Our Phase III program for AI-700 commenced
in 2003 under a U.S. Investigational New Drug application
(IND) and in compliance with applicable European
regulatory requirements. The Phase III clinical plan
provides for a two-part program consisting of a pilot phase,
which is designed to qualify and train new investigators, and
two multi-center pivotal trials each for approximately
300 patients with suspected coronary heart disease. The
Phase III pilot and pivotal phase studies are taking place
at clinical sites in North America and Europe with data from the
trials intended for submission to U.S., Canadian and European
regulatory authorities. The endpoints for the trials are
sensitivity and specificity in comparison to nuclear stress
testing, angiography or clinical outcome.

Our primary current emphasis in the
Phase III program is to enroll patients. We plan to
cumulatively enroll 300 patients in the Phase III
program by the end of 2004, to complete cumulative enrollment of
approximately 600 patients in the Phase III pivotal
trials by the end of 2005 and to file a New Drug Application
(NDA) for AI-700 in the first half of 2006. Although
these projected enrollment rates, milestones and target
completion dates reflect our current plans, we cannot assure you
that we will complete these activities on this schedule, if at
all.

AI-850 Clinical Trial Update

Our Phase I human safety study of AI-850 was
completed during the three months ended June 30, 2004.
AI-850 is a Cremophor-free reformulation of paclitaxel, the
active ingredient in Taxol®, a product used to treat a
variety of solid tumors. The primary goal of the study was to
provide human proof-of-concept that our Hydrophobic Drug
Delivery System (HDDSTM) is capable of intravenously
delivering hydrophobic drugs without the need for co-solvents
that are inconvenient to administer and are associated with
undesirable side effects. The primary objective of this trial
was to determine the maximum tolerated dose (MTD) of
AI-850. In the dose escalation study, 22 patients with
solid tumors (taxane naïve patients and patients who
previously had received taxane therapy) were treated with
AI-850 doses of 36-250 mg/m2 every three
weeks in cohorts of 3-6 patients. AI-850 was administered
without standard taxane pre-medications. Infusions of AI-850
were delivered in less than 30 minutes at all doses, which
is significantly shorter that the three-hour infusion typically
required by Taxol. The MTD of AI-850 for patients with extensive
prior taxane therapy was 205 mg/m2, which is
higher than the Taxol dose of 175 mg/m2
typically used to treat taxane naïve patients with
metastatic breast cancer. It is our current plan to seek
strategic collaborators for HDDS and AI-850 before commencing
additional clinical testing of this technology and product
candidate.

11



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##### Table of Contents



Patent Update

During the six months ended June 30, 2004,
we were issued two additional U.S. patents as follows:

|                |           |             |  |                   |  |                   |  |                                                                                  
|--------------- | --------- | ----------- |  | ----------------- |  | ----------------- |  | ---------------------------------------------------------------------------------
|U.S. Patent No. |           | Date Issued |  | Expiration Date   |  | Subject          
|                |           |             |  |                   |  |                  
|                | 6,689,390 |             |  | February 10, 2004 |  | February 22, 2019 |  | Matrices Formed of Polymer and Hydrophobic
    Compounds for Use in Drug Delivery
|                | 6,730,322 |             |  | May 4, 2004       |  | February 22, 2019 |  | Matrices Formed of Polymer and Hydrophobic
    Compounds for Use in Drug Delivery

As of June 30, 2004, we owned fifteen issued
U.S. patents, one allowed U.S. patent application and
twelve U.S. patent applications. We also own a number of
pending international and foreign patent applications
corresponding to these U.S. patents and applications.

Financial Operations Overview

Revenues.We have
not generated any operating revenues since our inception. In
connection with our collaboration with Nycomed, we expect to
receive $12 million in license fees and development
payments from July 2004 through June 2006. We anticipate that a
portion of these fees and payments will be recognized as
revenues in 2004. Further in the future, we will seek to
generate revenues from a combination of product sales, up-front
or milestone payments in connection with collaborative or
strategic relationships, and royalties resulting from the
license of our products and intellectual property and
manufacturing revenues.

Research and Development
Expense.Research and development
expense consists of expenses incurred in developing and testing
product candidates. These expenses consist primarily of salaries
and related expenses for personnel, fees paid to professional
service providers in conjunction with independently monitoring
our clinical trials and acquiring and evaluating data in
conjunction with our clinical trials, costs of contract
manufacturing services, costs of materials used in clinical
trials and research and development, depreciation of capital
resources used to develop our products, costs of facilities and
the legal costs of pursuing patent protection on select elements
of our intellectual property. We expense research and
development costs, including patent related costs, as incurred.
We believe that significant investment in product development is
a competitive necessity and plan to continue these investments
in order to realize the potential of our product candidates and
proprietary technologies. Development programs for later stage
product candidates, such as AI-700, tend to cost more than
earlier stage programs due to the length and the number of
patients enrolled in clinical trials for later stage programs.
From inception through June 30, 2004, we cumulatively spent
$84.2 million on research and development. Additionally,
from June 2000 through September 2002, we performed research and
development through a joint venture, as discussed below.

General and Administrative
Expense.General and administrative
expense consists primarily of salaries and other related costs
for personnel in executive, finance, accounting, information
technology and human resource functions. Other costs include
facility costs not otherwise included in research and
development expense and professional fees for legal and
accounting services. From inception through June 30, 2004,
we have cumulatively incurred $22.8 million in general and
administrative expense.

Stock-Based Compensation
Expense.Stock-based compensation
expense, which is a non-cash charge, results principally from
stock option grants to our employees at exercise prices deemed
for accounting purposes to be below the fair market value of our
stock on the date the stock options were granted (fixed
awards). Prior to our initial public offering, which
closed on October 14, 2003, we granted certain stock
options for which the exercise prices were deemed for accounting
purposes to be below the fair value of the underlying common
stock resulting in our recording stock-based compensation
expense associated with such grants. Stock-based compensation
expense is also recorded for stock option grants to
non-employees and for restricted stock grants provided to
directors and advisors in lieu of cash compensation. Deferred
compensation on fixed awards is amortized as a charge to
operations over the vesting periods of the options and grants,
subject to adjustment for forfeiture during the vesting period.
As of June 30, 2004, we deferred $1.4 million in

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stock-based compensation and, from inception
through June 30, 2004, recognized stock-based compensation
expense of $5.1 million.


Equity in Loss of Joint
Venture.In June 2000, we established
in collaboration with Elan Corporation, plc and its affiliates a
joint venture, Acusphere Newco, Ltd., a Bermuda corporation, to
develop and commercialize pulmonary drug delivery product
candidates. In September 2002, we reached an agreement with Elan
terminating the joint venture in a cash-free transaction. Equity
in loss of joint venture consists of our portion of the losses
from Acusphere Newco, Ltd. from June 2000, when the joint
venture was established, until September 2002, when the joint
venture was terminated. During that period, we owned an 80.1%
interest in the joint venture and Elan owned a 19.9% interest in
the joint venture on a fully diluted basis. Elan had retained
significant minority investor rights that prevented us from
exercising full control over the joint venture. Accordingly,
during the period from June 2000 to September 2002, we recorded
net losses of the joint venture in accordance with our
percentage ownership (80.1%) of such entity and reported such
loss using the equity method of accounting. In connection with
the termination of the joint venture we recorded a loss of
$381,413 for an amount previously recorded as due from Elan.
Including this amount, from inception through the date on which
we terminated our joint venture with Elan, we cumulatively
incurred $15.2 million in equity in loss of joint venture.

Interest and Other Income
(Expense).Interest income consists of
interest earned on our cash, and cash equivalents. Interest
expense consists of interest incurred on equipment leases and on
debt financings.

Accretion of Dividends and Offering Costs on
Convertible Preferred Stock.Accretion
of dividends and offering costs on convertible preferred stock
primarily consists of dividends on convertible preferred stock.
Prior to conversion of convertible preferred stock to common
stock, which occurred on October 14, 2003 upon the
completion of the our initial public offering, our convertible
preferred stock was entitled to accretion of dividends, the
amount of which decreased the amount of stockholders
equity available to common stockholders and effectively
increases the loss per share of common stock. After
October 14, 2003, no existing convertible preferred stock
is outstanding, and accordingly there will be no further
accretion of dividends and offering costs on these shares. All
preferred stock dividends which were accreted before
October 14, 2003 were forfeited by the preferred
stockholders on that date in connection with the conversion of
these preferred shares to common stock.

Results of Operations



| |                                        
| | ---------------------------------------
| | Three Months June 30, 2003 and
    2004

Research and Development
Expense.Research and development
expense increased $3.0 million, or 94%, to
$6.1 million in the three months ended June 30, 2004
from $3.1 million in the three months ended June 30,
2003. Research and development expense increased primarily due
to increased activities in the AI-700 Phase III clinical
program, including clinical site costs, data management costs,
independent clinical monitoring costs and costs of manufacturing
of clinical materials. The increase in research and development
costs also includes costs associated with increasing our full
and part-time personnel.

The following table summarizes the primary
components of our research and development expense for the three
months ended June 30, 2003 and 2004. Because of our ability
to utilize resources across several projects, many of our
research and development costs are not tied to any individual
project and are allocated

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among multiple projects. We record direct costs
on a project-by-project basis. We record indirect costs in
aggregate in support of all research and development.


|                                       |  |                    |       |      |  |   |       | 
|-------------------------------------- |  | ------------------ | ----- | ---- |  | - | ----- | 
|                                       |  |                   
|                                       |  | Three Months Ended
|                                       |  | June 30,          
|                                       |  |                   
|                                       |  | 2003               |       | 2004
|                                       |  |                    |       |     
|                                       |  |                   
|                                       |  | (In thousands)    
|AI-700                                 |  | $                  | 1,805 |      |  | $ | 4,352 | 
|AI-850 and AI-128                      |  |                    | 167   |      |  |   | 46    | 
|Other                                  |  |                    | 192   |      |  |   | 423   | 
|                                       |  |                    |       |      |  |   |       | 
|Total direct costs                     |  |                    | 2,164 |      |  |   | 4,821 | 
|Facility costs and depreciation        |  |                    | 927   |      |  |   | 1,037 | 
|Patent costs                           |  |                    | 55    |      |  |   | 245   | 
|                                       |  |                    |       |      |  |   |       | 
|Total research and development expense |  | $                  | 3,146 |      |  | $ | 6,103 | 
|                                       |  |                    |       |      |  |   |       | 

Research and development costs generally increase
as programs progress from early stage clinical trials to late
stage clinical trials. Our primary research and development
programs are as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Late Stage Clinical Development Program
    (AI-700).Our lead product candidate,
    AI-700, is a cardiovascular drug for the detection of coronary
    heart disease. We incurred direct research and development
    expense for AI-700 in the three months ended June 30, 2004
    of $4.4 million compared to $1.8 million in the three
    months ended June 30, 2003. Of these amounts, $688,000 for
    the three months ended June 30, 2004 and $344,000 for the
    three months ended June 30, 2003 were incurred in
    connection with the production of clinical trial material by a
    third-party contract manufacturer. In 2003, we commenced
    clinical studies in our Phase III clinical program for
    AI-700, and we identified and began training additional clinical
    sites to be part of this Phase III clinical program. We
    commenced the pivotal phase studies of our Phase III
    clinical program at select clinical sites in December 2003. As
    increasing numbers of patients are enrolled in the
    Phase III clinical program, we anticipate incurring
    increased costs from professional service firms helping to
    support the clinical trial by providing services such as
    independent clinical monitoring, data acquisition and data
    evaluation. We also anticipate incurring increased costs related
    to hiring of additional research and development and clinical
    personnel. In addition, we anticipate incurring increased costs
    associated with preparation for commercial production, including
    the build-out of our new commercial manufacturing space.
|
| |  | Early Stage Clinical Development Programs
    (AI-850 and AI-128).Our initial
    clinical applications of our HDDS technology, AI-850, and
    our PDDS technology, AI-128, are in early stages of
    clinical development. We incurred direct research and
    development expense for AI-850 and AI-128 in the three months
    ended June 30, 2004 of $46,000 compared to $167,000 in the
    three months ended June 30, 2003. There were no contract
    manufacturing costs incurred in connection with these product
    development programs during the three months ended June 30,
    2004 or for the three months ended June 30, 2003. During
    the three months ended June 30, 2004, we completed our
    Phase I clinical trials for AI-850. We anticipate that our
    costs associated with these clinical programs will not increase
    significantly until we are prepared to commence further
    pre-clinical and clinical testing using our own resources or
    through strategic collaborations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Other.Other direct
    research and development costs primarily consist of management
    and preclinical evaluation of other product candidates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

Each of our research and development programs are
subject to risks and uncertainties, including the requirement to
seek regulatory approvals, which are outside of our control. For
example, our clinical trials may be subject to delays or
rejections based on our inability to enroll patients at the rate
that we expect or our inability to produce clinical trial
material in sufficient quantities and of sufficient quality to
meet the schedule for our planned clinical trials. Moreover, the
product candidates identified in these research and development
programs, particularly our early stage programs, must overcome
significant technological, manufacturing and

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marketing challenges before they can be
successfully commercialized. As a result of these risks and
uncertainties, we are unable to predict with any certainty the
period in which material net cash inflows from such projects
could be expected to commence or the completion date of these
programs. Failure to commercialize these product candidates on a
timely basis could have a material adverse affect on our
business, financial condition and results of operations. We may
seek to establish additional collaborative relationships to help
us commercialize these product candidates, but there can be no
assurance that we will be successful in doing so.


General and Administrative
Expense.General and administrative
expense increased $417,000, or 42%, to $1.4 million in the
three months ended June 30, 2004 from $991,000 in the three
months ended June 30, 2003. The higher general and
administrative expense incurred in the three months ended
June 30, 2004 was principally due to the various costs of
being a public company, including costs associated with investor
relations, legal counsel, auditing and additional personnel.
Also contributing to the higher expenses are increased
activities in business development and marketing, including
market research expenses.

Stock-Based Compensation
Expense.Stock-based compensation
expense decreased $166,000, or 42%, to $226,000 in the three
months ended June 30, 2004 from $392,000 in the three
months ended June 30, 2003. Stock-based compensation
expense incurred in both periods resulted principally from the
vesting of stock options granted in prior periods on which
deferred compensation had previously been recorded and decreased
as a result of certain prior year awards becoming fully vested
in the current period.

Equity in Loss of Joint
Venture.Our joint venture with Elan
was terminated in September 2002. Research and development costs
for pulmonary drug delivery product candidates in the three
months ended June 30, 2004 and for the three months ended
June 30, 2003 are included in research and development
expense, as discussed above.

Interest and Other Income
(Expense).Interest and other income
(expense) increased $1.0 million, or 113%, to a net income
of $118,000 in the three months ended June 30, 2004 from a
net expense of $890,000 in the three months ended June 30,
2003. During these periods, interest and other income (expense)
consisted of the following:

|                       |            |                    |          |          |   |   |         |         | 
|---------------------- | ---------- | ------------------ | -------- | -------- | - | - | ------- | ------- | 
|                       |            |                   
|                       |            | Three Months Ended
|                       |            | June 30,          
|                       |            |                   
|                       |            | 2003               |          | 2004    
|                       |            |                    |          |         
|Interest income        |            | $                  | 47,000   |          |   | $ | 94,000  |        
|Other income (expense) |            |                    | (121,000 | )        |   |   | 74,000  |        
|Interest expense       |            |                    | (816,000 | )        |   |   | (50,000 | )      
|                       |            |                    |          |          |   |   |         |        
|                       | Total, net |                    | $        | (890,000 | ) |   | $       | 118,000 | 
|                       |            |                    |          |          |   |   |         |        

The increase in interest income in the three
months ended June 30, 2004 compared to the three months
ended June 30, 2003 was primarily due to higher average
fund balances available for investment resulting from funds
received from the initial public offering in October 2003. The
decrease in interest expense in the three months ended
June 30, 2004 compared to the three months ended
June 30, 2003 was primarily due to interest costs
associated with the bridge loans of $610,000, interest paid on
the subordinated loans payable of $86,000 and amortization of
the discount of $77,000 in the three months ended June 30,
2003 compared to zero in the three months ended June 30,
2004. The subordinated loans were paid off in June of 2003 and
the bridge loans converted into common stock upon completion of
the Companys Initial Public Offering on October 14,
2003. In addition to this, the interest expense on the lower
capital lease balances has decreased $22,000 from the three
months ended June 30, 2003 compared to the three months
ended June 30, 2004.

Accretion of Dividends and Offering Costs on
Convertible Preferred Stock.Accretion
of dividends and offering costs on convertible preferred stock
decreased $1.6 million, or 100%, to zero in the three
months ended June 30, 2004 from $1.6 million in the
three months ended June 30, 2003. The decrease was
primarily due to the conversion of all outstanding preferred
stock into common stock upon completion of the our initial
public offering on October 14, 2003. All preferred stock
dividends which were accreted before October 14,

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2003 were forfeited by the preferred stockholders
on that date in connection with the conversion of these
preferred shares to common stock. After October 14, 2003,
no existing convertible preferred stock is outstanding, and
accordingly there will be no further accretion of dividends and
offering costs on these shares.




| |                                      
| | -------------------------------------
| | Six Months June 30, 2003 and
    2004

Research and Development
Expense.Research and development
expense increased $5.4 million, or 86%, to
$11.6 million in the six months ended June 30, 2004
from $6.2 million in the six months ended June 30,
2003. Research and development expense increased primarily due
to increased activities in the AI-700 Phase III clinical
program, including clinical site costs, data management costs,
independent clinical monitoring costs and costs of manufacturing
of clinical materials. The increase in research and development
costs also includes costs associated with increasing full and
part-time personnel.

The following table summarizes the primary
components of our research and development expense for the six
months ended June 30, 2003 and 2004. Because of our ability
to utilize resources across several projects, many of our
research and development costs are not tied to any individual
project and are allocated among multiple projects. We record
direct costs on a project-by-project basis. We record indirect
costs in aggregate in support of all research and development.

|                                       |  |                  |       |      |  |   |        | 
|-------------------------------------- |  | ---------------- | ----- | ---- |  | - | ------ | 
|                                       |  |                 
|                                       |  | Six Months Ended
|                                       |  | June 30,        
|                                       |  |                 
|                                       |  | 2003             |       | 2004
|                                       |  |                  |       |     
|                                       |  |                 
|                                       |  | (In thousands)  
|AI-700                                 |  | $                | 3,306 |      |  | $ | 8,133  | 
|AI-850 and AI-128                      |  |                  | 459   |      |  |   | 126    | 
|Other                                  |  |                  | 570   |      |  |   | 817    | 
|                                       |  |                  |       |      |  |   |        | 
|Total direct costs                     |  |                  | 4,335 |      |  |   | 9,076  | 
|Facility costs and depreciation        |  |                  | 1,776 |      |  |   | 2,123  | 
|Patent costs                           |  |                  | 137   |      |  |   | 417    | 
|                                       |  |                  |       |      |  |   |        | 
|Total research and development expense |  | $                | 6,248 |      |  | $ | 11,616 | 
|                                       |  |                  |       |      |  |   |        | 

Research and development costs generally increase
as programs progress from early stage clinical trials to late
stage clinical trials. Our primary research and development
programs are as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Late Stage Clinical Development Program
    (AI-700).Our lead product candidate,
    AI-700, is a cardiovascular drug for the detection of coronary
    heart disease. We incurred direct research and development
    expense for AI-700 in the six months ended June 30, 2004 of
    $8.1 million compared to $3.3 million in the six
    months ended June 30, 2003. Of these amounts,
    $1.6 million for the six months ended June 30, 2004
    and $494,000 for the six months ended June 30, 2003 were
    incurred in connection with the production of clinical trial
    material by a third-party contract manufacturer. In 2003, we
    commenced clinical studies in our Phase III clinical
    program for AI-700, and we identified and began training
    additional clinical sites to be part of this Phase III
    clinical program. We commenced the pivotal phase studies of our
    Phase III clinical program at select clinical sites in
    December 2003. As increasing numbers of patients are enrolled in
    the Phase III clinical program, we anticipate incurring
    increased costs from professional service firms helping to
    support the clinical trial by providing services such as
    independent clinical monitoring, data acquisition and data
    evaluation. We also anticipate incurring increased costs related
    to hiring of additional research and development and clinical
    personnel. In addition, we anticipate incurring increased costs
    associated with preparation for commercial production, including
    the build-out of our new commercial manufacturing space.
|
| |  | Early Stage Clinical Development Programs
    (AI-850 and AI-128).Our initial
    clinical applications of our HDDS technology, AI-850, and
    our PDDS technology, AI-128, are in early stages of
    clinical development. We incurred direct research and
    development expense for AI-850 and AI-128 in the six months
    ended June 30, 2004 of $126,000 compared to $459,000 in the
    six months ended June 30, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | There were no contract manufacturing costs
    incurred in connection with these product development programs
    during the six months ended June 30, 2004 or for the six
    months ended June 30, 2003. During the three months ended
    June 30, 2004, we completed our Phase I clinical
    trials for AI-850. We anticipate that our costs associated with
    these clinical programs will not increase significantly until we
    are prepared to commence further pre-clinical and clinical
    testing using our own resources or through strategic
    collaborations.
|
| |  | Other.Other direct
    research and development costs primarily consist of management
    and preclinical evaluation of other product candidates.                                                                                                                                                                                                                                                                                                                                                                                                                                 

Each of our research and development programs are
subject to risks and uncertainties, including the requirement to
seek regulatory approvals, which are outside of our control. For
example, our clinical trials may be subject to delays or
rejections based on our inability to enroll patients at the rate
that we expect or our inability to produce clinical trial
material in sufficient quantities and of sufficient quality to
meet the schedule for our planned clinical trials. Moreover, the
product candidates identified in these research and development
programs, particularly our early stage programs, must overcome
significant technological, manufacturing and marketing
challenges before they can be successfully commercialized. As a
result of these risks and uncertainties, we are unable to
predict with any certainty the period in which material net cash
inflows from such projects could be expected to commence or the
completion date of these programs. Failure to commercialize
these product candidates on a timely basis could have a material
adverse affect on our business, financial condition and results
of operations. We may seek to establish additional collaborative
relationships to help us commercialize these product candidates,
but there can be no assurance that we will be successful in
doing so.

General and Administrative
Expense.General and administrative
expense increased $815,000, or 44%, to $2.7 million in the
six months ended June 30, 2004 from $1.9 million in
the six months ended June 30, 2003. The higher general and
administrative expense incurred in the six months ended
June 30, 2004 was principally due to the various costs of
being a public company, including costs associated with investor
relations, legal counsel, auditing and additional personnel.
Also contributing to the higher expenses are increased
activities in business development and marketing, including
market research expenses.

Stock-Based Compensation
Expense.Stock-based compensation
expense decreased $253,000, or 36%, to $459,000 in the six
months ended June 30, 2004 from $712,000 in the six months
ended June 30, 2003. Stock-based compensation expense
incurred in both periods resulted principally from the vesting
of stock options granted in prior periods on which deferred
compensation had previously been recorded and decreased as a
result of certain prior year awards becoming fully vested in the
current period.

Equity in Loss of Joint
Venture.Our joint venture with Elan
was terminated in September 2002. Research and development costs
for pulmonary drug delivery product candidates in the six months
ended June 30, 2004 and for the six months ended
June 30, 2003 are included in research and development
expense, as discussed above.

Interest and Other Income
(Expense).Interest and other income
(expense) increased $1.3 million, or 118%, to a net income
of $200,000 in the six months ended June 30, 2004 from a
net expense of $1.1 million in the six months ended
June 30, 2003. During these periods, interest and other
income (expense) consisted of the following:

|                       |            |                           |            |            |   |   |         |         | 
|---------------------- | ---------- | ------------------------- | ---------- | ---------- | - | - | ------- | ------- | 
|                       |            |                          
|                       |            | Six Months Ended June 30,
|                       |            |                          
|                       |            | 2003                      |            | 2004      
|                       |            |                           |            |           
|Interest income        |            | $                         | 69,000     |            |   | $ | 201,000 |        
|Other income (expense) |            |                           | (121,000   | )          |   |   | 74,000  |        
|Interest expense       |            |                           | (1,040,000 | )          |   |   | (75,000 | )      
|                       |            |                           |            |            |   |   |         |        
|                       | Total, net |                           | $          | (1,092,000 | ) |   | $       | 200,000 | 
|                       |            |                           |            |            |   |   |         |        

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##### Table of Contents



The increase in interest income in the six months
ended June 30, 2004 compared to the six months ended
June 30, 2003 was primarily due to higher average fund
balances available for investment resulting from funds received
from the initial public offering in October 2003. The decrease
in interest expense in the six months ended June 30, 2004
compared to the six months ended June 30, 2003 was
primarily due to interest costs associated with the bridge loans
of $610,000, interest paid on the subordinated loans payable of
$195,000 and amortization of the discount of $108,000 in the six
months ended June 30, 2003 compared to zero in the six
months ended June 30, 2004. The subordinated loans were
paid off in June of 2003 and the bridge loans converted into
common stock upon completion of the Companys Initial
Public Offering on October 14, 2003. In addition to this,
the interest expense on the lower capital lease balances has
decreased $45,000 from the six months ended June 30, 2003
compared to the six months ended June 30, 2004.

Accretion of Dividends and Offering Costs on
Convertible Preferred Stock.Accretion
of dividends and offering costs on convertible preferred stock
decreased $3.2 million, or 100%, to zero in the six months
ended June 30, 2004 from $3.2 million in the six
months ended June 30, 2003. The decrease was primarily due
to the conversion of all outstanding preferred stock into common
stock upon completion of the our initial public offering on
October 14, 2003. All preferred stock dividends which were
accreted before October 14, 2003 were forfeited by the
preferred stockholders on that date in connection with the
conversion of these preferred shares to common stock. After
October 14, 2003, no existing convertible preferred stock
is outstanding, and accordingly there will be no further
accretion of dividends and offering costs on these shares.

Liquidity and Capital Resources

Historically, we have financed our business
through the issuance of equity securities, debt financings and
equipment leases. Our liquidity requirements have arisen
primarily from research and development expenditures, equipment
expenditures and payments on outstanding indebtedness. As of
June 30, 2004, we had cash and cash equivalents of
$38.8 million. Since our inception in July 1993 through
June 30, 2004, we have raised $161.6 million through
the issuance of equity securities, including $47.6 million
from our initial public offering in October 2003 and the
$19.4 million in convertible promissory notes which
converted to common stock upon the completion of our initial
public offering. As of June 30, 2004 we owed $644,000 from
capital leases, $415,000 from notes payable and had commitments
totaling $21.0 million for rent under our facility leases,
including the lease agreement signed in July 2004 for commercial
manufacturing space in Tewksbury, Massachusetts.

During the six months ended June 30, 2004,
operating activities used $12.4 million of cash. Net cash
used by operating activities during this period resulted
primarily from a net loss of $14.5 million. This use of
cash was partially offset by an increase in accrued expenses of
$684,000, an increase in accounts payable of $312,000, non-cash
charges for depreciation and amortization of $635,000 and
non-cash charges for stock-based compensation expense of
$459,000.

During the six months ended June 30, 2004,
investing activities used $3.4 million in cash. This use of
cash was solely for purchases of equipment.

During the six months ended June 30, 2004,
financing activities provided $8,000 in cash. Net cash provided
by financing activities during this period resulted primarily
from entering in promissory notes under the equipment financing
line, described below, of $424,000, proceeds from stock option
exercises of $36,000 and proceeds from the sale of common stock
through the Employee Stock Purchase Plan of $12,000. These
proceeds were partially offset by payments on the capital leases
and promissory notes of $465,000.

In April 2004, we entered into an
$8.0 million equipment financing line with an equipment
financing company. Borrowings under this equipment line can be
made against qualified purchases through March 2005. Such
borrowings are to be secured by the qualified purchases and
repaid over 36 to 48 months, depending on the nature of the
equipment financed. No warrants were granted in connection with
this equipment line. The $8.0 million equipment line is
structured as a loan agreement. However, we may elect to borrow
up to $4.0 million of this amount in the form of a capital
lease. The interest rate on this facility varies depending upon
whether the borrowing is in the form of a loan or lease and
whether the term is 36 months or 48 months. Such
interest rates are fixed at the time of each borrowing under the
equipment line with such rates adjusted

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between borrowings based on the U.S. Federal
Reserves Three Year and Four Year Treasury Constant
Maturity Rates. The equipment line includes provisions to
increase the line to $11.3 million upon the occurrence of
certain defined events. As of June 30, 2004, the Company
had approximately $7.6 million available for additional
borrowings under this equipment line.


In July 2004, the Company entered into a
collaboration, license and supply agreement with Nycomed
Danmark ApS (Nycomed) in which the Company granted Nycomed
rights to develop and market AI-700 in Europe. As part of this
agreement, in July 2004 Nycomed paid the Company a
$4.0 million license fee and the first of eight consecutive
quarterly installments of $1.0 million each. Beginning in
October 2004, Nycomed is required to pay the Company the
remaining seven consecutive quarterly installments of
$1.0 million each. The agreement also provides for Nycomed
to pay the Company up to $58.0 million in milestone
payments upon achievement of certain regulatory milestones and
sales goals. Under the agreement, the Company will also be paid
to manufacture AI-700 for Nycomed and is entitled to royalties
on Nycomeds sales of AI-700. The Company will pay a
customary fee to its financial advisor in this transaction. The
fee will be comprised of cash and warrants and the total amount
of such payments are dependent upon the timing and magnitude of
the amounts paid by Nycomed to the Company.

In July 2004, the Company entered into a
lease agreement for 58,000 square feet of commercial
manufacturing space in Tewksbury, Massachusetts. This lease has
a five year, nine month term with options to extend the lease
for up to two additional five-year terms at predetermined rental
rates. Initially, Acusphere will receive nine months of
occupancy free of base rent, followed by base rent of
approximately $400,000 for the next twelve months with scheduled
annual rental rate increases thereafter. An initial security
deposit of $1.0 million is required as part of the lease,
subject to reduction upon the Company making certain tenant
improvements and the installation of equipment in the facility.

In July 2004, the Company entered into
definitive purchase agreements with institutional and accredited
investors for a $21.5 million private placement of up to
3,440,000 newly issued shares of common stock at a price of
$6.25 per share and warrants to purchase up to an
additional 688,000 shares of common stock at an exercise
price of $8.50 per share. In August 2004, a partial
closing of this private placement was consummated, resulting in
aggregate gross proceeds to the Company of approximately
$17.9 million and the issuance of 2,865,522 shares of
common stock and warrants to purchase up to an additional
573,105 shares of common stock.

A second and final closing of this private
financing will occur subject to receiving shareholder approval
in accordance with Nasdaq marketplace rules and customary
closing conditions. The second closing is expected to occur
later in 2004 and would result in aggregate gross proceeds to
the Company of approximately $3.6 million and the issuance
of 574,478 shares of common stock at a price of
$6.25 per share and warrants to purchase up to an
additional 114,895 shares of common stock at an exercise
price of $8.50 per share.

Net proceeds from the financing are expected to
be used to further fund the development program for AI-700 and
for working capital and general corporate purposes.

The shares of common stock and warrants sold in
the private placement have not been registered under the
Securities Act of 1933, as amended, or state securities laws and
may not be offered or sold in the United States absent
registration with the Securities and Exchange Commission or an
applicable exemption from these registration requirements. The
Company has agreed to file a registration statement with the
Securities and Exchange Commission covering the resale of the
shares of common stock issued in the private placement and the
shares of common stock issued upon exercise of the warrants.

We believe, based on our operating plans, that
our existing resources, including scheduled proceeds from
Nycomed and from our $21.5 million private financing, will
be sufficient to fund our planned operations, including
increases in spending for our AI-700 Phase III clinical
program, through 2005. However, over the next several months and
years we may require significant additional funds to develop,
conduct clinical trials, achieve regulatory approvals, build-out
commercial manufacturing space and, subject to regulatory
approval, commercially launch AI-700, our other product
candidates under development and future product candidates. Our
future capital requirements will depend on many factors,
including the scope and progress made in our research and
development activities and our clinical trials and the size and
timing of creating expanded manufacturing capabilities. We may
also need additional funds for possible future strategic
acquisitions of

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businesses, products or technologies
complementary to our business. We do not expect to generate
significant revenues, other than possible license or milestone
payments, from commercial sale of our products unless or until
we or current or potential partners complete clinical trials for
our products and receive marketing approval from the applicable
regulatory authorities. If additional funds are required, we may
raise such funds from time to time through public or private
sales of equity or from borrowings. Financing may not be
available on acceptable terms, or at all, and our failure to
raise capital when needed could materially adversely impact our
growth plans and our financial condition and results of
operations. Additional equity financing may be dilutive to the
holders of our common stock and debt financing, if available,
may involve significant cash payment obligations and covenants
that restrict our ability to operate our business.


Contractual Obligations

The following table summarizes our contractual
obligations as of June 30, 2004 and the effect such
obligations are expected to have on our liquidity and cash flow
in future periods:

Payments Due by Period

|                                      |  |                |        |           |  |         |       |         |  |         |       |       |  |   |       |  |  |   |       |  |  |   |       | 
|------------------------------------- |  | -------------- | ------ | --------- |  | ------- | ----- | ------- |  | ------- | ----- | ----- |  | - | ----- |  |  | - | ----- |  |  | - | ----- | 
|                                      |  | Total          |        |           |  | 2005    |       | 2007    |  | 2009    |       |      
|                                      |  | Obligations    |        | Remainder |  | through |       | through |  | through |       | After
|                                      |  | All Years      |        | of 2004   |  | 2006    |       | 2008    |  | 2010    |       | 2010 
|                                      |  |                |        |           |  |         |       |         |  |         |       |      
|                                      |  |               
|                                      |  | (In thousands)
|Capital lease obligations             |  | $              | 644    |           |  | $       | 439   |         |  | $       | 205   |       |  | $ |      |  |  | $ |      |  |  | $ |      | 
|Operating lease obligations           |  |                | 20,974 |           |  |         | 1,073 |         |  |         | 5,239 |       |  |   | 5,911 |  |  |   | 6,022 |  |  |   | 2,729 | 
|Notes payable                         |  |                | 415    |           |  |         | 42    |         |  |         | 106   |       |  |   | 117   |  |  |   | 103   |  |  |   | 47    | 
|Purchase orders for capital equipment |  |                | 5,063  |           |  |         | 3,578 |         |  |         | 1,485 |       |  |   |      |  |  |   |      |  |  |   |      | 
|                                      |  |                |        |           |  |         |       |         |  |         |       |       |  |   |       |  |  |   |       |  |  |   |       | 
|Total contractual cash obligations    |  | $              | 27,096 |           |  | $       | 5,132 |         |  | $       | 7,035 |       |  | $ | 6,028 |  |  | $ | 6,125 |  |  | $ | 2,776 | 
|                                      |  |                |        |           |  |         |       |         |  |         |       |       |  |   |       |  |  |   |       |  |  |   |       | 

The operating lease obligations in the table
above include the lease agreement for commercial manufacturing
space in Tewksbury, Massachusetts that was entered into in
July 2004.

As of June 30, 2004, we have entered into
purchase orders for capital equipment which total approximately
$8.0 million. Against these purchase orders we have paid
approximately $2.9 million in deposits. The table above
reflects the remaining amounts due on these purchase orders.

Critical Accounting Policies and
Estimates

Our discussion and analysis of our financial
condition and results of operations are based on our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities and expenses. On an
on-going basis, we evaluate our estimates and judgments,
including those related to accrued expenses, fair valuation of
stock related to stock-based compensation and income taxes. We
based our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or
conditions.

We believe the following critical accounting
policies affect our more significant judgments and estimates
used in the preparation of our consolidated financial statements.

Accrued Expenses.As
part of the process of preparing consolidated financial
statements we are required to estimate accrued expenses. This
process involves identifying services which have been performed
on our behalf and estimating the level of service performed and
the associated cost incurred for such service as of

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each balance sheet date in our consolidated
financial statements. Examples of estimated expenses for which
we accrue include professional service fees, such as lawyers and
accountants, and contract service fees such as amounts paid to
clinical monitors, data management organizations and
investigators in conjunction with clinical trials, and fees paid
to contract manufacturers in conjunction with the production of
clinical materials. In connection with such service fees, our
estimates are most affected by our understanding of the status
and timing of services provided relative to the actual levels of
services incurred by such service providers. The majority of our
service providers invoice us monthly in arrears for services
performed. In the event that we do not identify certain costs
which have begun to be incurred or we under- or over-estimate
the level of services performed or the costs of such services,
our reported expenses for such period would be too low or too
high. The date on which certain services commence, the level of
services performed on or before a given date and the cost of
such services are often judgmental. We make these judgments
based upon the facts and circumstances known to us in accordance
with generally accepted accounting principles.


Stock-Based Compensation and Other Equity
Instruments.We have elected to follow
APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations, in accounting for
our stock-based compensation plans, rather than the alternative
fair value accounting method provided for under
SFAS No. 123, Accounting for Stock-Based
Compensation. Accordingly, we have not recorded stock-based
compensation expense for stock options issued to employees in
fixed amounts with exercise prices at least equal to the fair
value of the underlying common stock on the date of grant. In
the notes to our consolidated financial statements we provide
pro forma disclosures in accordance with SFAS No. 123
and related pronouncements. We account for transactions in which
services are received in exchange for equity instruments based
on the fair value of such services received from non-employees
or of the equity instruments issued, whichever is more reliably
measured, in accordance with SFAS No. 123 and EITF
Issue No. 96-18, Accounting for Equity Instruments that
Are Issued to Other than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services. We account for
transactions in which we grant warrants in connection with the
issuance of debt in accordance with APB 14, Accounting
for Convertible Debt and Debt Issued with Stock Purchase
Warrants. The two factors which most affect charges or
credits to operations related to stock-based compensation are
the fair value of the common stock underlying stock options for
which stock-based compensation is recorded and the volatility of
such fair value.

Accounting for equity instruments granted or sold
by us under APB No. 14, APB No. 25,
SFAS No. 123 and EITF No. 96-18 requires fair
value estimates of the equity instrument granted or sold. If our
estimates of the fair value of these equity instruments are too
high or too low, it would have the effect of overstating or
understating expenses. When equity instruments are granted or
sold in exchange for the receipt of goods or services and the
value of those goods or services can be readily estimated, we
use the value of such goods or services to determine the fair
value of the equity instruments. When equity instruments are
granted or sold in exchange for the receipt of goods or services
and the value of those goods or services can not be readily
estimated, as is true in connection with most stock options and
warrants granted to employees or non-employees, we estimated the
fair value of the equity instruments based upon consideration of
factors which we deemed to be relevant at the time using cost,
market and/or income approaches to such valuations. Because
shares of our common stock were not publicly traded prior to our
initial public offering in October 2003, market factors
historically considered in valuing stock and stock option grants
included comparative values of public companies discounted for
the risk and limited liquidity provided for in the shares we are
issuing, pricing of private sales of our convertible preferred
stock, prior valuations of stock grants and the effect of events
that have occurred between the time of such grants, economic
trends, perspective provided by investment banks and the
comparative rights and preferences of the security being granted
compared to the rights and preferences of our other outstanding
equity.

Income Taxes.As
part of the process of preparing our consolidated financial
statements we are required to estimate our income taxes in each
of the jurisdictions in which we operate. This process involves
estimating our actual current tax exposure together with
assessing temporary differences resulting from differing
treatments of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities. In
addition, as of December 31, 2003, we had federal tax net
operating loss carryforwards of $68.5 million, which expire
through 2023. We also have research and development credit
carryforwards of

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$2.6 million. We have recorded a valuation
allowance to fully offset against these otherwise recognizable
net deferred tax assets due to the uncertainty surrounding the
timing of the realization of the tax benefit. In the event that
we determine in the future that we will be able to realize all
or a portion of its net deferred tax benefit, an adjustment to
deferred tax valuation allowance would increase net income in
the period in which such a determination is made. The Tax Reform
Act of 1986 contains provisions that may limit the utilization
of net operating loss carryforwards and credits available to be
used in any given year in the event of significant changes in
ownership interest, as defined.


Certain Factors Which May Affect Future
Results

Our operating results and financial condition
have varied in the past and may in the future vary significantly
depending on a number of factors. Except for the historical
information in this report, the matters contained in this report
include forward-looking statements that involve risks and
uncertainties. The following factors, among others, could cause
actual results to differ materially from those contained in
forward-looking statements made in this report and presented
elsewhere by management from time to time. Such factors, among
others, may have a material adverse effect upon our business,
results of operations and financial condition.

Risks Related to Our Company



| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | We have not generated revenues to date, and
    we may not achieve profitability for some time, if at
    all.

We are focused on product development and we have
not generated any revenues to date. We have incurred losses each
year of our operations and we expect to continue to incur
operating losses for the next several years. The process of
developing our products requires significant clinical,
development and laboratory testing and clinical trials as well
as regulatory approvals. In addition, commercialization of our
product candidates will require us to establish sales, marketing
and manufacturing capabilities, either through internal hiring
or through contractual relationships with others. We expect our
research and development and general and administrative expenses
will increase over the next several years. As of June 30,
2004, our cumulative net loss was $130.0 million.



| |                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to obtain regulatory approvals
    for our product candidates under development, and in particular
    our lead product candidate AI-700, we will not be able to
    generate revenues from the commercialization or sale of our
    product candidates.

We must receive regulatory approval of each of
our product candidates before we can commercialize or sell that
product candidate. The pre-clinical laboratory testing,
formulation development, manufacturing and clinical trials of
any product candidates we develop independently or in
collaboration with third parties, as well as the distribution
and marketing of these product candidates, are regulated by
numerous federal, state and local governmental authorities in
the United States, principally the FDA, and by similar agencies
in other countries. The development and regulatory approval
process takes many years, requires the expenditure of
substantial resources, is uncertain and subject to delays, and
will thus delay our receipt of revenues, if any, from any of our
product candidates. We cannot assure you that our clinical
trials will demonstrate the safety and efficacy of any of our
product candidates or will result in marketable products.

No product can receive FDA approval unless human
clinical trials show both safety and efficacy for each target
indication in accordance with FDA standards. A number of
companies in the pharmaceutical and biotechnology industries
have suffered significant setbacks in late stage clinical trials
even after achieving promising results in early stage
development. We therefore cannot assure you that the results
from our Phase II clinical trials for AI-700 will be
predictive of results obtained in our Phase III clinical
trials. Many of the patients in our AI-700 clinical trial have
coronary heart disease. As part of our AI-700 Phase III
clinical trials, patients will be exposed to potential safety
risks associated with a stress test, including risks associated
with a pharmacological stressor, and AI-700. Given the nature of
the AI-700 Phase III clinical trial, including
administering AI-700 to larger numbers of at-risk patients and
new clinical sites, adverse events are expected to be
encountered during the clinical trial. Adverse events are also
likely to be encountered in clinical trials for

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our other products, which clinical trials also
include at-risk patients. For example, our AI-850 trial consists
of patients being treated for late-stage cancer. If significant
adverse events are detected and these events are attributable to
our products, such events could delay, limit or prevent
regulatory agency approval. Further, data obtained from
pre-clinical and clinical activities are subject to varying
interpretations that could delay, limit or prevent regulatory
agency approval. We cannot assure you that our Phase III
plan for AI-700 will successfully address the concerns of the
FDA or that the results of the Phase III program will
establish the safety and efficacy of AI-700 sufficiently for us
to obtain regulatory approval.


We may also encounter delays or rejections based
on our inability to enroll enough patients to complete our
clinical trials. We may also encounter delays, resulting in the
need to enroll more patients than expected in our clinical
trials, based on our inability to enroll a mix of patients that
is consistent with our estimated clinical trial enrollment.
Patient enrollment depends on many factors, including the size
of the patient population, the nature of the protocol, the
proximity of patients to clinical sites, and the eligibility
criteria for the study and the freedom to operate with respect
to intellectual property. Delays in planned patient enrollment,
or the need to enroll more patients, may result in increased
costs and delays, which could have a harmful effect on our
ability to develop products. We may encounter delays or
rejections based on changes in regulatory agency policies during
the period in which we develop a drug or the period required for
review of any application for regulatory agency approval of a
particular compound. On May 1, 2004, changes went into
effect in the regulation of clinical trials in Europe.
Implementation of these changes could lead to delays to our
clinical trials. We also may encounter delays in the event we
are unable to produce clinical trial material in sufficient
quantities and of sufficient quality to meet the schedule for
our planned clinical trials. In addition, we rely on a number of
third parties, such as clinical research organizations, to help
support the clinical trials by performing independent clinical
monitoring, data acquisition and data evaluations. Any failure
on the part of these third parties could delay the regulatory
approval process.

Failure to obtain regulatory approval or any
delay or setback in obtaining regulatory agency approvals could:



| |   |                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------
| |  | adversely affect our ability to market any drugs
    we develop independently or with collaborative partners;
|
| |  | impose additional costs and diminish any
    competitive advantages that we may attain; or                   
|
| |  | adversely affect our ability to generate
    royalties.                                                      

In particular, failure to obtain approval or
substantial delays in obtaining approval for our lead product
candidate, AI-700, would delay our receipt of product revenues
and materially adversely affect our business, financial
condition and results of operations.

We cannot be certain that we will obtain any
regulatory approvals in other countries and the failure to
obtain these approvals may materially adversely affect our
business, financial condition and results of operations. In
order to market our products outside of the United States, we
and our current, and potential future, collaborative partners
must establish and comply with numerous and varying regulatory
requirements of other countries regarding safety and efficacy.
The approval procedures vary among countries and can involve
additional product testing and additional administrative review
periods. The time required to obtain approval in other countries
might differ from that required to obtain FDA approval. The
regulatory approval process in other countries may include all
of the risks associated with obtaining FDA approval detailed
above. Approval by the FDA does not ensure approval by the
regulatory authorities of other countries. In addition, many
countries outside the United States require a separate review
process prior to marketing to determine whether their national
health insurance scheme will pay for newly approved products, as
well as the price which may be charged for a product.



| |                                                                      
| | ---------------------------------------------------------------------
| | Our products, if approved, may fail to
    achieve market acceptance.

There can be no assurance that any products we
successfully develop, if approved for marketing, will achieve
market acceptance or generate significant revenues. Each of our
product candidates is intended to replace or alter existing
therapies or procedures, and hospitals, physicians or patients
may conclude that these

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products are less safe or effective or otherwise
less attractive than these existing therapies or procedures. For
example, our lead product candidate, AI-700, is a contrast agent
for use in ultrasound imaging procedures which will compete with
existing nuclear imaging and stress echocardiography. Hospitals,
physicians or patients may prefer these existing procedures to
AI-700 enhanced ultrasound imaging. If our products do not
receive market acceptance for any reason, it would adversely
affect our business, financial condition and results of
operations.


Further, our competitors may develop new
technologies or products that are more effective or less costly,
or that seem more cost-effective, than our products. We can give
no assurance that hospitals, physicians, patients or the medical
community in general will accept and use any products that we
may develop.



| |                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we cannot raise additional capital on
    acceptable terms, we may be unable to complete planned clinical
    trials, obtain regulatory approvals or commercialize our product
    candidates.

We will require substantial future capital in
order to continue to conduct the research and development,
clinical and regulatory activities necessary to bring our
product candidates to market and to establish commercial
manufacturing, marketing and sales capabilities. Our future
capital requirements will depend on many factors, including:



| |   |                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------
| |  | the progress of pre-clinical development and
    laboratory testing and clinical trials;                              
|
| |  | the timing and size to which we expand our
    manufacturing capabilities;                                            
|
| |  | the time and costs involved in obtaining
    regulatory approvals;                                                    
|
| |  | the number of product candidates we pursue;                                                                           
|
| |  | the costs involved in filing and prosecuting
    patent applications and enforcing or defending patent
    claims; and
|
| |  | the establishment of selected strategic alliances
    and activities required for product commercialization.          

We intend to seek additional funding through
strategic collaborations and may seek funding through private or
public sales of our securities or by licensing all or a portion
of our technology. This funding may significantly dilute
existing stockholders or may limit our rights to our technology.

In July 2004, we entered into definitive purchase
agreements with institutional and accredited investors for a
$21.5 million private placement of up to 3,440,000 newly
issued shares of common stock at a price of $6.25 per share and
warrants to purchase up to an additional 688,000 shares of
common stock at an exercise price of $8.50 per share. In August
2004, a partial closing of this private placement was
consummated, resulting in aggregate gross proceeds to the
Company of approximately $17.9 million and the issuance of
2,865,522 shares of common stock and warrants to purchase
up to an additional 573,105 shares of common stock. A
second and final closing of this private financing would result
in aggregate gross proceeds to the Company of approximately
$3.6 million and the issuance of 574,478 shares of
common stock at a price of $6.25 per share and warrants to
purchase up to an additional 114,895 shares of common stock
at an exercise price of $8.50 per share. This second and
final closing will occur only upon receiving shareholder
approval in accordance with Nasdaq marketplace rules and
satisfaction of customary closing conditions, including the
absence of any material adverse event affecting Acusphere. We
can not assure you that we will receive shareholder approval for
this second closing, or that all of the other closing
conditions, such as the absence of a material adverse event
affecting Acusphere, will be satisfied. Failure to satisfy all
of these closing conditions would prevent us from consummating
this second closing, which would have a material adverse impact
on our financial condition.

We cannot assure you that we can obtain
additional funding on reasonable terms, or at all. If we cannot
obtain adequate funds, we may:



| |   |                                                                                   
| | - | ----------------------------------------------------------------------------------
| |  | terminate or delay clinical trials for one or
    more of our product candidates; 
|
| |  | delay our establishment of sales, marketing
    and/or manufacturing capabilities;

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| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | curtail significant product development programs
    that are designed to identify new product candidates; and/or
|
| |  | relinquish rights to our technologies or product
    candidates.                                                 



| |                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Claims by other companies that we infringe
    their proprietary technology may result in liability for damages
    or stop our development and commercialization
    efforts.

Competitors and other third parties may initiate
patent litigation against us in the United States or in foreign
countries based on existing patents or patents that may be
granted in the future. Many of our competitors have obtained
patents covering products and processes generally related to our
products and processes, and they may assert these patents
against us. Moreover, there can be no assurance that these
competitors have not sought or will not seek additional patents
that may cover aspects of our technology. As a result, there is
a greater likelihood of a patent dispute than would be expected
if our competitors were pursuing unrelated technologies.

While we conduct patent searches to determine
whether the technologies used in our products infringe patents
held by third parties, numerous patent applications are
currently pending and may be filed in the future for
technologies generally related to our technologies, including
many patent applications that remain confidential after filing.
Due to these factors and the inherent uncertainty in conducting
patent searches, there can be no guarantee that we will not
violate third-party patent rights that we have not yet
identified.

We know of U.S. and foreign patents issued to
third parties that relate to aspects of our product candidates.
There may also be patent applications filed by these or other
parties in the United States and various foreign jurisdictions
that relate to some aspects of our product candidates, which, if
issued, could subject us to infringement actions. In particular,
we are aware of U.S. and foreign patents owned by third parties,
including potential competitors, that arguably cover aspects of
our AI-700 contrast agent. We and several of these parties have
recently been actively engaged in opposing the grant of European
patents with claims that arguably cover aspects of our AI-700
product. Parties may contest patents in Europe prior to
contesting the counterpart patents in the United States because
of procedural differences between European and U.S. patent
laws as well as economic considerations. There is a significant
possibility that one or more of these third parties will use
litigation to assert their patents in the United States or
Europe.

The owners or licensees of these and other
patents may file one or more infringement actions against us. In
addition, a competitor may claim misappropriation of a trade
secret by an employee hired from that competitor. Any such
infringement or misappropriation action could cause us to incur
substantial costs defending the lawsuit and could distract our
management from our business, even if the allegations of
infringement or misappropriation are unwarranted. The defense of
multiple claims could have a disproportionately greater impact.
Furthermore, a party making this type of claim could secure a
judgment that requires us to pay substantial damages. A judgment
could also include an injunction or other court order that could
prevent us from making, using, selling, offering for sale or
importing our products or prevent our customers from using our
products. If a court determined or if we independently
discovered that any of our products or manufacturing processes
violated third-party proprietary rights, our clinical trials
could be delayed and there can be no assurance that we would be
able to reengineer the product or processes to avoid those
rights, or to obtain a license under those rights on
commercially reasonable terms, if at all.



| |                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to protect our
    intellectual propriety rights, our competitors may develop and
    market products with similar features that may reduce demand for
    our products, and we may be prevented from establishing
    collaborative relationships on favorable terms.

The following factors are important to our
success:



| |   |                                                            
| | - | -----------------------------------------------------------
| |  | receiving patent protection for our product
    candidates;
|
| |  | maintaining our trade secrets;                             

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| |   |                                                              
| | - | -------------------------------------------------------------
| |  | not infringing on the proprietary rights of
    others; and  
|
| |  | preventing others from infringing our proprietary
    rights.

We will be able to protect our proprietary rights
from unauthorized use by third parties only to the extent that
our proprietary rights are covered by valid and enforceable
patents or are effectively maintained as trade secrets.

We try to protect our proprietary position by
filing U.S. and foreign patent applications related to our
proprietary technology, inventions and improvements that are
important to the development of our business. Because the patent
position of pharmaceutical companies involves complex legal and
factual questions, the issuance, scope and enforceability of
patents cannot be predicted with certainty. Patents, if issued,
may be challenged, invalidated or circumvented. Thus, any
patents that we own or license from others may not provide any
protection against competitors. Our pending patent applications,
those we may file in the future, or those we may license from
third parties, may not result in patents being issued. If
issued, they may not provide us with proprietary protection or
competitive advantages against competitors with similar
technology. Furthermore, others may independently develop
similar technologies or duplicate any technology that we have
developed. The laws of many foreign countries do not protect our
intellectual property rights to the same extent as do the laws
of the United States.

We also rely on trade secrets, know-how and
technology, which are not protected by patents, to maintain our
competitive position. We try to protect this information by
entering into confidentiality agreements with parties that have
access to it, such as our corporate partners, collaborators,
employees and consultants. Any of these parties may breach the
agreements and disclose our confidential information or our
competitors might learn of the information in some other way. If
any trade secret, know-how or other technology not protected by
a patent were to be disclosed to or independently developed by a
competitor, our business and financial condition could be
materially adversely affected.



| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | We may become involved in lawsuits to
    protect or enforce our patents that would be expensive and time
    consuming.

In order to protect or enforce our patent rights,
we may initiate patent litigation against third parties in the
United States or in foreign countries. In addition, we may
become subject to interference or opposition proceedings
conducted in patent and trademark offices to determine the
priority of inventions. The defense of intellectual property
rights, including patent rights through lawsuits, interference
or opposition proceedings, and other legal and administrative
proceedings would be costly and divert our technical and
management personnel from their normal responsibilities. An
adverse determination of any litigation or defense proceedings
could put one or more of our patents at risk of being
invalidated or interpreted narrowly and could put our patent
applications at risk of not issuing.

Furthermore, because of the substantial amount of
discovery required in connection with intellectual property
litigation, there is a risk that some of our confidential
information could be compromised by disclosure during this type
of litigation. For example, during the course of this kind of
litigation, confidential information may be inadvertently
disclosed in the form of documents or testimony in connection
with discovery requests, depositions or trial testimony. This
disclosure could materially adversely affect our business and
financial results.



| |                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have never manufactured any of our
    product candidates in commercial quantities, and if we fail to
    develop an effective manufacturing capability for our products,
    including our lead product candidate AI-700, we may be unable to
    commercialize these products.

We have no experience in manufacturing our
products for commercial use and limited experience in designing
equipment for the manufacture of our products. We intend to
create and qualify a commercial manufacturing facility in
Tewksbury, Massachusetts and to demonstrate that we can produce
AI-700 at a commercial manufacturing scale prior to our filing
of a NDA for AI-700 and, subject to required regulatory
approvals, we intend to manufacture AI-700 in this facility for
commercial use. We can not assure you that we

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will be able to successfully manufacture our
products in sufficient quantities for commercial sale, or obtain
the necessary regulatory approvals for such commercial
manufacture, at all or in a timely or economical manner. Our
intention to manufacture AI-700 or other products exposes us to
the following risks, any of which could delay or prevent the
approval of our products by the FDA or corresponding state and
foreign agencies, or the commercialization of our products, or
result in higher costs or inability to meet demand for AI-700
leading to potential revenue loss, and any of which would have a
material adverse impact on our business, financial condition and
results of operations.




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Manufacturers often encounter difficulties in
    achieving volume production, quality control and quality
    assurance. Accordingly, we might not be able to manufacture
    sufficient quantities of drugs to meet our clinical schedules or
    to commercialize our products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Manufacturers are obliged to manufacture in
    highly controlled environments and to operate in accordance with
    FDA and international mandated current good manufacturing
    practices, or cGMPs. For our clinical trials we have relied on
    contract manufacturers for such facilities and cGMP compliance.
    In July 2004, we entered into a lease for a facility in
    Tewksbury, Massachusetts that we intend to convert into a
    commercial manufacturing facility for AI-700. Creation and
    qualification of a commercial manufacturing environment requires
    significant expertise and capital resources, including the
    development of advanced manufacturing techniques and process
    controls and is subject to local and state planning approvals.
    Manufacturers of pharmaceutical products often encounter
    difficulties in constructing and qualifying new manufacturing
    facilities and in production, especially in scaling-up initial
    production. A failure within this new facility to establish and
    follow cGMPs and to document adherence to such practices may
    lead to significant delays in the availability of material for
    our NDA filing or commercial production for AI-700 and may delay
    or prevent filing or approval of marketing applications for our
    products or the ability to continue to manufacture the products.
    Any such delays would further require us to continue to operate
    this facility and incur related costs.                                                                                     
|
| |  | For each of our current product candidates we
    will initially rely on a single commercial manufacturing site,
    directly or through a contract manufacturer, without the backup
    of a second site that is qualified for commercial manufacture of
    the product. Qualification of another manufacturing site can be
    expensive and time consuming. Prior to using product from a new
    manufacturing site, we must demonstrate that the specifications
    for the product are consistent with the specifications for the
    product as it was manufactured at a prior qualified site or we
    must clinically or otherwise demonstrate that the safety and
    efficacy of the product produced in the new manufacturing site
    is consistent with the product as it was manufactured at the
    prior site. Demonstrating such consistency may be difficult,
    expensive or time consuming. In addition, before we would be
    able to produce product for clinical use at a new facility, it
    will have to undergo a pre-approval inspection by the FDA and
    corresponding state and foreign agencies. Once approved, drug
    manufacturers are subject to ongoing periodic unannounced
    inspection by the FDA and corresponding state and foreign
    agencies to ensure strict compliance with cGMPs, other
    government regulations and corresponding foreign standards.
    Failure to maintain compliance with cGMP or with safety or
    environmental regulations could result in penalties, product
    recalls or restrictions on the use of the manufacturing site.

Under the terms of our collaboration agreement
with Nycomed, we are responsible for the commercial manufacture
of AI-700 for marketing and sale by Nycomed in Europe. Failure
to manufacture AI-700 in a timely manner or on an economic
basis, or in sufficient quantities, could jeopardize our
relationship with Nycomed. We do not currently have a European
sales force, nor do we have experience with regard to the
commercialization, marketing, sale or distribution of
pharmaceutical products in Europe, and we rely entirely on
Nycomed for this expertise. Any termination of our relationship
with Nycomed would have a material adverse impact on our
business, financial condition and results of operations.

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| |                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If third-party manufacturers of our
    products fail to devote sufficient time and resources to our
    concerns, or if their performance is substandard, our clinical
    trials may be delayed and our costs may rise.

We may rely substantially on third-party contract
manufacturers to supply, store and distribute our potential
products for our clinical trials and other development needs.
Our reliance on these third-party manufacturers will expose us
to the following risks, any of which could delay or prevent the
completion of our clinical trials, the approval of our products
by the FDA, or the commercialization of our products, result in
higher costs, or deprive us of additional product candidates,
and any of which would have a material adverse impact on our
business, financial condition and results of operations.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Contract manufacturers often encounter
    difficulties in achieving volume production, quality control and
    quality assurance, as well as shortages of qualified personnel.
    Accordingly, a manufacturer might not be able to manufacture
    sufficient quantities of drugs to meet our clinical schedules.                                                                                                                                                                                                                                                      
|
| |  | Contract manufacturers are obliged to operate in
    accordance with FDA-mandated current good manufacturing
    practices, or cGMPs. A failure of these contract manufacturers
    to establish and follow cGMPs and to document their adherence to
    such practices may lead to significant delays in the
    availability of material for clinical study and may delay or
    prevent filing or approval of marketing applications for our
    products.                                                                                                            
|
| |  | For each of our current product candidates we
    will initially rely on a single manufacturer. Changing these or
    future manufacturers may be difficult and the number of
    potential manufacturers is limited. Changing manufacturers may
    require re-validation of the manufacturing processes and
    procedures in accordance with FDA-mandated cGMPs. Such
    re-validation may be costly and time-consuming. It may be
    difficult or impossible for us to find replacement manufacturers
    on acceptable terms quickly, or at all.                  
|
| |  | Our contract manufacturers may not perform as
    agreed or may not remain in the contract manufacturing business
    for the time required to produce, store and distribute our
    products successfully. Our manufacturing levels, while important
    to us, can represent relatively small fractions of the overall
    business of most qualified contract manufactures. As a result,
    the contract manufactures may not provide us with the attention
    that we need or may be unwilling to adapt to necessary changes
    in our manufacturing requirements.

Drug manufacturers are subject to ongoing
periodic unannounced inspection by the FDA and corresponding
state and foreign agencies to ensure strict compliance with
cGMPs, other government regulations and corresponding foreign
standards. While we are obligated to audit the performance of
third party contractors, we do not have control over our
third-party manufacturers compliance with these
regulations and standards. Failure by our third-party
manufacturers or us to comply with applicable regulations could
result in sanctions being imposed on us, including fines,
injunctions, civil penalties, failure of the government to grant
market approval of drugs, delays, suspension or withdrawal of
approvals, seizures or recalls of product, operating
restrictions and criminal prosecutions, any of which could
significantly and adversely affect our business.



| |                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------
| | We may not be able to manufacture our
    products in commercial quantities, which would prevent us from
    marketing our products.

To date our product candidates have been
manufactured in small quantities for pre-clinical and clinical
trials. If any of these product candidates are approved by the
FDA or foreign regulatory authorities for commercial sale, we
will need to manufacture them in larger quantities. We cannot
assure you that we will be able to successfully increase the
manufacturing capacity, whether on our own or in collaboration
with third party manufacturers, for any of our product
candidates in a timely or economic manner, or at all.
Significant scale-up of manufacturing may require certain
additional validation studies, which the FDA must review and
approve. If we are unable to successfully increase the
manufacturing capacity for a product candidate, the regulatory
approval or commercial launch of that product candidate may be
delayed or there may be a shortage in supply of that product
candidate. Our product candidates require precise, high quality
manufacturing. Our failure to achieve and maintain these high
manufacturing standards, including the incidence of

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manufacturing errors, could result in patient
injury or death, product recalls or withdrawals, delays or
failures in product testing or delivery, cost overruns or other
problems that could seriously hurt our business.




| |                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------
| | Materials necessary to manufacture our
    products may not be available, which may delay our development
    and commercialization activities.

Only a few facilities manufacture some of the raw
materials necessary to manufacture our products. For example,
the manufacture of AI-850 will require bulk quantities of
paclitaxel, a natural substance that is difficult to produce and
is in limited supply. We currently have no supply agreements in
place with any supply facility. If we need to purchase a raw
material that is in limited supply for our clinical trials, or
for commercial distribution if we obtain marketing approval of a
product candidate, we cannot assure you that one or more
suppliers would be able to sell us that raw material at the time
we need it and on commercially reasonable terms. If we change
suppliers for any of these materials or any of our suppliers
experiences a shutdown or disruption in the facilities used to
produce these materials, due to technical, regulatory or other
problems, it could harm our ability to manufacture our products.
Our inability to obtain required raw materials for any reason
could substantially impair our development activities or the
production, marketing and distribution of our products.



| |                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------
| | We have no experience selling, marketing or
    distributing our products and no internal capability to do
    so.

If we receive regulatory approval to commence
commercial sales of any of our products, we will face
competition with respect to commercial sales, marketing and
distribution. These are areas in which we have no experience. To
market any of our products directly, we must develop a direct
marketing and sales force with technical expertise and
supporting distribution capability. Alternatively, we may engage
a pharmaceutical or other healthcare company with an existing
distribution system and direct sales force to assist us. There
can be no assurance that we will successfully establish sales
and distribution capabilities either on our own or in
collaboration with third parties or gain market acceptance for
our products. To the extent we have or will enter co-promotion
or other licensing arrangements, any revenues we receive will
depend on the efforts of third parties and there can be no
assurance that our efforts will succeed.



| |                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------
| | We will establish collaborative
    relationships, and those relationships may expose us to a number
    of risks.

We will rely on a number of significant
collaborative relationships with pharmaceutical or other
healthcare companies for our manufacturing, research funding,
clinical development and/or sales and marketing performance.
Reliance on collaborative relationships poses a number of risks,
including the following:



| |   |                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we cannot effectively control whether our
    corporate partners will devote sufficient resources to our
    programs or product candidates;                                                                                                                    
|
| |  | disputes may arise in the future with respect to
    the ownership of rights to technology developed with
    collaborators;                                                                                                                                    
|
| |  | disagreements with collaborators could delay or
    terminate the research and development, regulatory approval or
    commercialization of product candidates, or result in litigation
    or arbitration;                                                     
|
| |  | corporate partners may have considerable
    discretion in electing whether to pursue the development of any
    additional product candidates and may pursue technologies or
    products either on their own or in collaboration with our
    competitors; and
|
| |  | collaborators with marketing rights may choose to
    devote fewer resources to the marketing of our product
    candidates than they do to product candidates of their own
    development.                                                                    

For example, we established a joint venture with
Elan Corporation, plc and affiliates in 2000. At the time, we
anticipated that we would share the cost of pre-clinical and
clinical trials for product candidates being developed by the
joint venture with Elan. In 2002, for reasons beyond our
control, Elan ceased funding the joint venture and the joint
venture was terminated. In connection with the termination, we
agreed to pay Elan

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a royalty if we commercialize the asthma product
candidate that was being developed by the joint venture. Future
development of product candidates will require that we provide
all the funding for the cost of development and clinical trials
or identify collaborators to share in the costs.


In July 2004, we entered into a collaboration,
license and supply agreement with Nycomed in which we granted
Nycomed rights to develop and market AI-700 in Europe. There can
be no assurance that the regulatory goals, sales targets and
other objectives of this agreement will be achieved. Failure to
achieve these goals, targets and objectives would result in our
inability to receive license, milestone, royalty and other
payments under this agreement, which would have a material
adverse impact on our business, financial condition and results
of operations.

Given these risks, our current and future
collaborative efforts may not be successful. Failure of these
efforts could delay our product development or impair
commercialization of our products, and have a material adverse
effect on our business, financial condition and results of
operations.



| |                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------
| | Competition in the pharmaceutical industry
    is intense, and if we fail to compete effectively our financial
    results will suffer.

We engage in a business characterized by
extensive research efforts, rapid developments and intense
competition. We cannot assure you that our products will compete
successfully or that research and development by others will not
render our products obsolete or uneconomical. Our failure to
compete effectively would materially adversely affect our
business, financial condition and results of operations. We
expect that successful competition will depend, among other
things, on product efficacy, safety, reliability, availability,
timing and scope of regulatory approval and price. Specifically,
we expect important factors will include the relative speed with
which we can develop products, complete the clinical,
development and laboratory testing and regulatory approval
processes and supply commercial quantities of the product to the
market.

We expect competition to increase as
technological advances are made and commercial applications
broaden. In commercializing our initial product candidates and
any additional products we develop using our HDDS and PDDS
technologies, we will face substantial competition from large
pharmaceutical, biotechnology and other companies, universities
and research institutions.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | AI-700, our ultrasound contrast agent and lead
    product candidate, if approved for marketing and sale, will
    compete with nuclear stress tests, the current standard of care
    in myocardial perfusion imaging. Nuclear contrast agents that
    are approved for use in myocardial perfusion imaging include
    products marketed by Amersham, Bristol-Myers Squibb and Tyco
    International. In addition, Amersham, Bristol-Myers Squibb and
    Imcor have developed ultrasound contrast agents that have been
    approved by the FDA for resting wall motion studies, and in the
    future they may seek to broaden their products to include stress
    echo and myocardial perfusion assessment. Moreover, we are aware
    that other companies, such as Bracco, are developing ultrasound
    contrast agents for wall imaging and for radiology applications,
    and that Point Biomedical is developing an ultrasound contrast
    agent specifically for myocardial perfusion imaging. In March
    2004, Point announced that it had recently completed two pivotal
    Phase III trials for this contrast agent and plans to file
    an NDA with the FDA later this year. Finally, some cardiologists
    may find it satisfactory to use stress echo without contrast for
    the detection of coronary heart disease.
|
| |  | AI-850, our reformulation of paclitaxel, if
    approved for marketing and sale, will also face intense
    competition from companies such as American Pharmaceutical
    Partners, NeoPharm and Sonus Pharmaceuticals, which are applying
    significant resources and expertise to developing reformulations
    of paclitaxel for intravenous delivery. Other companies, such as
    Cell Therapeutics, are developing new chemical entities that
    involve paclitaxel conjugated, or chemically bound, to another
    chemical.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | AI-128, our sustained release formulation of an
    asthma drug, if approved for marketing and sale, will also face
    intense competition. Companies such as Alkermes possess
    technology that may be suitable for sustained release pulmonary
    drug delivery and may have competitive programs that have not
    been                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

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| |  |                                                                                                                                                                                                                                                                                            
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | publicly announced or may decide to begin such
    programs in the future. In addition, large pharmaceutical
    companies that market FDA-approved asthma drugs may be
    developing sustained release versions of their asthma drugs that
    would compete with our product candidates.

Relative to us, most of our competitors have
substantially greater capital resources, research and
development staffs, facilities and experience in conducting
clinical trials and obtaining regulatory approvals, as well as
in manufacturing and marketing pharmaceutical products. Many of
our competitors may achieve product commercialization or patent
protection earlier than we will. Furthermore, we believe that
some of our competitors have used, and may continue to use,
litigation to gain a competitive advantage. Finally, our
competitors may use different technologies or approaches to the
development of products similar to the products we are seeking
to develop.



| |                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to retain key personnel
    and hire additional qualified scientific, sales and marketing,
    and other personnel, we may not be able to successfully achieve
    our goals.

We depend on the principal members of our
scientific and management staff. The loss of any of these
principal members services might significantly delay or
prevent the achievement of research, development or business
objectives and could materially adversely affect our business,
financial condition and results of operations. We do not
maintain key person life insurance on any of these principal
members. We do not have employment contracts with any of these
principal members.

Our success depends, in large part, on our
ability to attract and retain qualified scientific and
management personnel such as these individuals. We face intense
competition for such personnel and consultants. We cannot assure
you that we will attract and retain qualified management and
scientific personnel in the future.

Further, we expect that our potential expansion
into areas and activities requiring additional expertise, such
as further clinical trials, governmental approvals, commercial
manufacturing and marketing, will place additional requirements
on our management, operational and financial resources. We
expect these demands will require an increase in management and
scientific personnel and the development of additional expertise
by existing management personnel. The failure to attract and
retain such personnel or to develop such expertise could
materially adversely affect prospects for our success.



| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | We expect to develop international
    operations that will expose us to additional business
    risks.

In the future, we expect to develop operations
outside the United States in order to market and distribute our
products. Regardless of the extent to which we seek to develop
these operations ourselves or in collaboration with others, we
cannot be sure that our international efforts will be
successful. Any expansion into international markets will
require additional resources and management attention and will
subject us to new business risks. These risks could lower the
prices at which we can sell our products or otherwise have an
adverse effect on our operating results. Among the risks we
believe are most likely to affect any international operations
are:



| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| |  | different regulatory requirements for approval of
    our product candidates;            
|
| |  | dependence on local distributors;                                                        
|
| |  | longer payment cycles and problems in collecting
    accounts receivable;                
|
| |  | adverse changes in trade and tax regulations;                                            
|
| |  | the absence or significant lack of legal
    protection for intellectual property rights;
|
| |  | political and economic instability; and                                                  
|
| |  | currency risks.                                                                          

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Risks Relating to Our Industry



| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | Even if we obtain marketing approval, our
    products will be subject to ongoing regulatory
    review.

If regulatory approval of a product is granted,
such approval may be subject to limitations on the indicated
uses for which the product may be marketed or contain
requirements for costly, post-marketing follow-up studies. As to
products for which marketing approval is obtained, the
manufacturer of the product and the manufacturing facilities
will be subject to continual review and periodic inspections by
the FDA and other regulatory authorities. In addition, the
labeling, packaging, adverse event reporting, storage,
advertising, promotion and record keeping related to the product
will remain subject to extensive regulatory requirements. The
subsequent discovery of previously unknown problems with the
product, manufacturer or facility may result in restrictions on
the product or the manufacturer, including withdrawal of the
product from the market. We may be slow to adapt, or we may
never adapt, to changes in existing requirements or adoption of
new requirements or policies.

If we fail to comply with applicable regulatory
requirements, we may be subject to fines, suspension or
withdrawal of regulatory approvals, product recalls, seizure of
products, operating restrictions and criminal prosecution.



| |                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | Market acceptance of our products will be
    limited if users of our products are unable to obtain adequate
    reimbursement from third-party payors.

Government health administration authorities,
private health insurers and other organizations generally
provide reimbursement for products like our product candidates,
and our commercial success will depend in part on these
third-party payors agreeing to reimburse patients for the costs
of our products. Even if we succeed in bringing any of our
proposed products to market, we cannot assure you that
third-party payors will consider our products cost-effective or
provide reimbursement in whole or in part for their use.

Significant uncertainty exists as to the
reimbursement status of newly approved health care products.
Each of our product candidates is intended to replace or alter
existing therapies or procedures. These third-party payors may
conclude that our products are less safe, effective or
cost-effective than these existing therapies or procedures.
Therefore, third-party payors may not approve our products for
reimbursement.

If third-party payors do not approve our products
for reimbursement or fail to reimburse them adequately, sales
will suffer as some physicians or their patients will opt for a
competing product that is approved for reimbursement or is
adequately reimbursed. Even if third-party payors make
reimbursement available, these payors reimbursement
policies may adversely affect the ability of us and our
potential collaborators to sell our products on a profitable
basis.

Moreover, the trend toward managed healthcare in
the United States, the growth of organizations such as health
maintenance organizations, and legislative proposals to reform
healthcare and government insurance programs could significantly
influence the purchase of healthcare services and products,
resulting in lower prices and reduced demand for our products
which could adversely affect our business, financial condition
and results of operations.

In addition, legislation and regulations
affecting the pricing of pharmaceuticals may change in ways
adverse to us before or after the FDA or other regulatory
agencies approve any of our proposed products for marketing.
While we cannot predict the likelihood of any of these
legislative or regulatory proposals, if any government or
regulatory agencies adopt these proposals they could materially
adversely affect our business, financial condition and results
of operations.



| |                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may be required to defend lawsuits or
    pay damages in connection with the alleged or actual harm caused
    by our products or product candidates.

We face an inherent business risk of exposure to
product liability claims in the event that the use of our
products is alleged to have resulted in harm to others. This
risk exists in clinical trials as well as in commercial
distribution. In addition, the pharmaceutical and biotechnology
industries in general have been subject to

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significant medical malpractice litigation. We
may incur significant liability if product liability or
malpractice lawsuits against us are successful. Furthermore,
product liability claims, regardless of their merits, could be
costly and divert our managements attention from other
business concerns, or adversely affect our reputation and the
demand for our products. Although we maintain product liability
insurance, we cannot be certain that this coverage will be
adequate or that it will continue to be available to us on
acceptable terms.




| |                                                                 
| | ----------------------------------------------------------------
| | Rapid technological change could make our
    products obsolete.

Pharmaceutical technologies have undergone rapid
and significant change. We expect that pharmaceutical
technologies will continue to develop rapidly. Our future will
depend in large part on our ability to maintain a competitive
position with respect to these technologies. Any compounds,
products or processes that we develop may become obsolete before
we recover any expenses incurred in connection with their
development. Rapid technological change could make our products
obsolete, which could materially adversely affect our business,
financial condition and results of operations.



| |                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our products involve the use of hazardous
    materials, and as a result we are exposed to potential liability
    claims and to costs associated with complying with laws
    regulating hazardous waste.

Our research and development activities involve
the use of hazardous materials, including chemicals and
biological materials. We believe that our procedures for
handling hazardous materials comply with federal and state
regulations. However, there can be no assurance that accidental
injury or contamination from these materials will not occur. In
the event of an accident, we could be held liable for any
damages, which could exceed our available financial resources.
This liability could materially adversely affect our business,
financial condition and results of operations.

We are subject to federal, state and local laws
and regulations governing the use, manufacture, storage,
handling and disposal of hazardous materials and waste products,
and we spent approximately $14,000 in the six months ended
June 30, 2004 to dispose of these hazardous materials and
waste products. We may be required to incur significant costs to
comply with environmental laws and regulations in the future
that could materially adversely affect our business, financial
condition and results of operations.

Risks Related to Our Common Stock



| |                                                                 
| | ----------------------------------------------------------------
| | We expect that our stock price will
    fluctuate significantly.

We only recently completed our initial public
offering. Prior to this offering, you could not buy or sell our
common stock publicly. After this offering, the average daily
trading volume for our common stock has been relatively low. An
active public market for our common stock may not continue to
develop or be sustained. The stock market, particularly in
recent years, has experienced significant volatility
particularly with respect to pharmaceutical and biotechnology
stocks. The volatility of pharmaceutical and biotechnology
stocks often does not relate to the operating performance of the
companies represented by the stock. Factors that could cause
this volatility in the market price of our common stock include:



| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | announcements of the introduction of new products
    by us or our competitors;       
|
| |  | market conditions in the pharmaceutical and
    biotechnology sectors;                
|
| |  | rumors relating to us or our competitors;                                             
|
| |  | litigation or public concern about the safety of
    our potential products;          
|
| |  | our quarterly operating results;                                                      
|
| |  | deviations in our operating results from the
    estimates of securities analysts; and
|
| |  | FDA or international regulatory actions.                                              

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| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | We may be the subject of securities class
    action litigation due to future stock price
    volatility.

In the past, when the market price of a stock has
been volatile, holders of that stock have often instituted
securities class action litigation against the company that
issued the stock. If any of our stockholders brought a lawsuit
against us, we could incur substantial costs defending the
lawsuit. The lawsuit could also divert the time and attention of
our management.



| |                                                                                                     
| | ----------------------------------------------------------------------------------------------------
| | Future sales of common stock by our
    existing stockholders may cause our stock price to
    fall.

The market price of our common stock could
decline as a result of sales by our existing stockholders of
shares of common stock in the market, or the perception that
these sales could occur. These sales might also make it more
difficult for us to sell equity securities at a time and price
that we deem appropriate. Upon the completion of our initial
public offering on October 14, 2004, approximately 74% of
our outstanding common stock was held by private investors,
officers, employees and directors who acquired their shares
prior to the initial public offering. Many of these
shareholders, in connection with the initial public offering,
were subject to lock-up agreements. Prohibitions on selling
shares under these lock-up agreements expired on April 4,
2004.



| |                                                                                     
| | ------------------------------------------------------------------------------------
| | Our directors and management will exercise
    significant control over our company.

Our directors and executive officers and their
affiliates collectively control approximately 27.3% of our
outstanding common stock, excluding unexercised options and
warrants. As a result, these stockholders, if they act together,
will be able to influence our management and affairs and all
matters requiring stockholder approval, including the election
of directors and approval of significant corporate transactions.
This concentration of ownership may have the effect of delaying
or preventing a change in control of our company and might
affect the market price of our common stock.



| |                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Provisions of Delaware law or our charter
    documents could delay or prevent an acquisition of us, even if
    the acquisition would be beneficial to our stockholders, and
    could make it more difficult for you to change
    management.

Provisions of Delaware law or our charter or
by-laws could hamper a third partys acquisition of us, or
discourage a third party from attempting to acquire control of
us. Stockholders who wish to participate in these transactions
may not have the opportunity to do so. These provisions could
also limit the price that investors might be willing to pay in
the future for shares of our common stock. Further, these
provisions make it more difficult for stockholders to change the
composition of our board of directors in any one year.

These provisions include:



| |   |                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a provision allowing us to issue preferred stock
    with rights senior to those of the common stock without any
    further vote or action by the holders of the common stock;                                                                                                                                                 
|
| |  | the existence of a staggered board of directors
    in which there are three classes of directors serving staggered
    three-year terms, thus expanding the time required to change the
    composition of a majority of directors and potentially
    discouraging someone from making an acquisition proposal for us;        
|
| |  | the by-laws requirement that stockholders
    provide advance notice when nominating our directors;                                                                                                                                                                                                                            
|
| |  | the inability of stockholders to convene a
    stockholders meeting without the chairperson of the board,
    the chief executive officer, the president or a majority of the
    board of directors first calling the meeting; and                                                                                            
|
| |  | the application of Delaware law prohibiting us
    from entering into a business combination with the beneficial
    owner of 15% or more of our outstanding voting stock for a
    period of three years after the 15% or greater owner first
    reached that level of stock ownership, unless we meet specified
    criteria.

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| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | We have never paid dividends on our capital
    stock, and we do not anticipate paying any cash dividends in the
    foreseeable future.

We have paid no cash dividends on any of our
classes of capital stock to date and we currently intend to
retain our future earnings, if any, to fund the development and
growth of our businesses. In addition, the terms of any future
debt or credit facility may preclude us from paying these
dividends. As a result, capital appreciation, if any, of our
common stock will be your sole source of gain for the
foreseeable future.




ITEM 3.     QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have not used derivative financial instruments
for speculation or trading purposes. However, we are exposed to
market risk related to changes in interest rates. Our current
policy is to maintain an investment portfolio consisting mainly
of U.S. money market and government-grade securities,
directly or through managed funds, with maturities of one year
or less. Our cash is deposited in and invested through highly
rated financial institutions in North America. Our short-term
investments are subject to interest rate risk and will fall in
value if market interest rates increase. If market interest
rates were to increase immediately and uniformly by 10% from
levels at June 30, 2004, we estimate that the fair value of
our investment portfolio would decline by an immaterial amount.
We currently have the ability to hold our fixed income
investments until maturity, and therefore we do not expect our
operating results or cash flows to be affected to any
significant degree by the effect of a change in market interest
rates on our investments.

Effects of Inflation

Our assets are primarily monetary, consisting of
cash, and cash equivalents. Because of their liquidity, these
assets are not directly affected by inflation. We also believe
that we have intangible assets in the value of our technology.
In accordance with generally accepted accounting principles, we
have not capitalized the value of this intellectual property on
our consolidated balance sheet. Due to the nature of this
intellectual property, we believe that these intangible assets
are not affected by inflation. Because we intend to retain and
continue to use our equipment, furniture and fixtures and
leasehold improvements, we believe that the incremental
inflation related to replacement costs of such items will not
materially affect our operations. However, the rate of inflation
affects our expenses, such as those for employee compensation
and contract services, which could increase our level of
expenses and the rate at which we use our resources.




ITEM 4.     CONTROLS
AND PROCEDURES

Evaluation of Disclosure Controls and
Procedures

As of June 30, 2004 (the Evaluation
Date), the Companys management, with the
participation of the Companys Chief Executive Officer and
the Companys Senior Vice President and Chief Financial
Officer, evaluated the effectiveness of the Companys
disclosure controls and procedures pursuant to
Rule 13a-15(b) promulgated under the Securities Exchange
Act of 1934, as amended (the Exchange Act). Based
upon that evaluation, the Companys Chief Executive Officer
and the Companys Senior Vice President and Chief Financial
Officer concluded that, as of the Evaluation Date, the
Companys disclosure controls and procedures were effective
in ensuring that material information required to be disclosed
by the Company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange
Commissions rules and forms, including ensuring that such
material information is accumulated and communicated to the
Companys management, including the Companys Chief
Executive Officer and the Companys Senior Vice President
and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.

Internal Control Over Financial
Reporting

During the period covered by this report, there
have been no changes in the Companys internal control over
financial reporting that have materially affected, or are
reasonably likely to materially affect, the Companys
internal control over financial reporting.

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##### Table of Contents






PART II.                       OTHER
INFORMATION



ITEM 1.     LEGAL
PROCEEDINGS

None




ITEM 2.     UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) In July 2004, the Company entered into
definitive purchase agreements with institutional and accredited
investors for a $21.5 million private placement of up to
3,440,000 newly issued shares of common stock at a price of
$6.25 per share and warrants to purchase up to an
additional 688,000 shares of common stock at an exercise
price of $8.50 per share. In August 2004, a partial closing of
this private placement was consummated, resulting in aggregate
gross proceeds to the Company of approximately
$17.9 million and the issuance of 2,865,522 shares of
common stock and warrants to purchase up to an additional
573,105 shares of common stock.

A second and final closing of this private
financing will occur subject to receiving shareholder approval
in accordance with Nasdaq marketplace rules and customary
closing conditions. The second closing is expected to occur
later in 2004 and would result in aggregate gross proceeds to
the Company of approximately $3.6 million and the issuance
of 574,478 shares of common stock at a price of
$6.25 per share and warrants to purchase up to an
additional 114,895 shares of common stock at an exercise
price of $8.50 per share.

Net proceeds from the financing are expected to
be used to further fund the development program for AI-700 and
for working capital and general corporate purposes.

The shares of common stock and warrants sold in
the private placement have not been registered under the
Securities Act of 1933, as amended, or state securities laws and
may not be offered or sold in the United States absent
registration with the Securities and Exchange Commission or an
applicable exemption from these registration requirements. The
Company has agreed to file a registration statement with the
Securities and Exchange Commission covering the resale of the
shares of common stock issued in the private placement and the
shares of common stock issued upon exercise of the warrants.

(b) On October 14, 2003, we closed the
sale of an aggregate of 3,750,000 shares of our common
stock, $0.01 par value, in our initial public offering at a
price to the public of $14.00 per share. The managing
underwriters in the offering were SG Cowen Securities
Corporation, Thomas Weisel Partners LLC, U.S. Bancorp Piper
Jaffray and Friedman Billings Ramsey. All of the shares of
common stock sold in the offering were registered under the
1933 Act on a Registration Statement on Form S-1 (Reg.
No. 333-106725) that was declared effective by the SEC on
October 7, 2003 and a Registration Statement filed pursuant
to Rule 424(b) under the Securities Act that was filed on
October 8, 2003 (Reg. No. 333-106725). The offering
commenced on October 7, 2003 and did not terminate until
after the sale of all of the securities registered in the
Registration Statement. As part of the initial public offering,
we granted the several underwriters an overallotment option to
purchase up to an additional 562,500 shares of our common
stock from us. The underwriters did not exercise the
overallotment option. There were no selling stockholders in the
offering.

The aggregate price of the offering amount
registered on our behalf was $52.5 million. In connection
with the offering, we paid $3.7 million in underwriting
discounts and commissions to the underwriters and incurred an
estimated $1.2 million in other offering expenses. None of
the underwriting discounts and commissions or offering expenses
were incurred or paid to directors or officers of ours or their
associates or to persons owning 10 percent or more of our
common stock or to any affiliates of ours. After deducting the
underwriting discounts and commissions and offering expenses, we
received net proceeds from the offering of approximately
$47.6 million. The proceeds to us have conformed with our
intended use outlined in the prospectus related to the offering.

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##### Table of Contents






ITEM 3.     DEFAULTS
UPON SENIOR SECURITIES

None




ITEM 4.     SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS

At the Companys Annual Meeting of
Stockholders held on June 10, 2004, the stockholders
approved the following:

Elected one person to serve as a Class I
director as follows:

|                |  |           |            |                |  |  |        | 
|--------------- |  | --------- | ---------- | -------------- |  |  | ------ | 
|Director        |  | Votes For |            | Votes Withheld
|                |  |           |            |               
|Sherri C. Oberg |  |           | 10,345,151 |                |  |  | 54,850 | 




ITEM 5.     OTHER
INFORMATION

None




ITEM 6.     EXHIBITS
AND REPORTS ON FORM 8-K

(a) List of exhibits:

|        |      |                     |  |                                                                                                                                                                             
|------- | ---- | ------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |                    
|Number  |      | Exhibit Description
|        |      |                    
|        | 31.1 |                     |  | Certification of the Chief Executive Officer
    under Section 302 of the Sarbanes-Oxley Act of 2002 as
    defined in Exchange Act Rules 13a-14 and 15d-14                 
|        | 31.2 |                     |  | Certification of the Chief Financial Officer
    under Section 302 of the Sarbanes-Oxley Act of 2002 as
    defined in Exchange Act Rules 13a-14 and 15d-14                 
|        | 32.1 |                     |  | Certifications of the Chief Executive Officer and
    Chief Financial Officer under Section 906 of the
    Sarbanes-Oxley Act of 2002 pursuant to 18 U.S.C.
    Section 1350

(b) Reports on Form 8-K:

On May 6, 2004, we furnished with the
Securities and Exchange Commission a Current Report on
Form 8-K reporting the public dissemination of a press
release announcing our financial results for the first quarter
of 2004.

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SIGNATURES

Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized on this 5th day of August 2004.



| |                
| | ---------------
| | ACUSPHERE, INC.



| |     |                    
| | --- | -------------------
| | By: | /s/ SHERRI C. OBERG

| |                                          
| | -----------------------------------------
| |                                          
| | Sherri C. Oberg                          
| | President and Chief Executive
    Officer



| |     |                  
| | --- | -----------------
| | By: | /s/ JOHN F. THERO

| |                                                      
| | -----------------------------------------------------
| |                                                      
| | John F. Thero                                        
| | Senior Vice President and Chief Financial
    Officer
| | (Principal Financial and Accounting Officer
    and  
| | Duly Authorized Officer)                             

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EXHIBIT INDEX

|        |      |                     |  |                                                                                                                                                                             
|------- | ---- | ------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |                    
|Number  |      | Exhibit Description
|        |      |                    
|        | 31.1 |                     |  | Certification of the Chief Executive Officer
    under Section 302 of the Sarbanes-Oxley Act of 2002 as
    defined in Exchange Act Rules 13a-14 and 15d-14                 
|        | 31.2 |                     |  | Certification of the Chief Financial Officer
    under Section 302 of the Sarbanes-Oxley Act of 2002 as
    defined in Exchange Act Rules 13a-14 and 15d-14                 
|        | 32.1 |                     |  | Certifications of the Chief Executive Officer and
    Chief Financial Officer under Section 906 of the
    Sarbanes-Oxley Act of 2002 pursuant to 18 U.S.C.
    Section 1350